Divorce and financial planning
It's an unpalatable fact that the UK has one of the highest marriage failure rates in Europe. The division of both assets and liabilities accrued throughout a marriage can be a very complicated process, especially at this traumatic time. If you find yourself in this situation, sensible planning is crucial.
There are approximately 158,700 divorces a year in the UK with September the month that has the largest number of people filing. Source: Office of National Statistics (2003)
Where to start
It may seem obvious, but start by making a list of your joint assets. You need to ensure that your list includes property, pensions, investments and savings, but don't forget other items such as a collection of jewellery. Then consider how these should be divided.
You will also need to calculate what your current expenditure amounts to and how much you may need when living as a single person. Factor in all possible costs, including the possibility of paying early redemption penalties on the mortgage if you have to sell the marital home.
Property transfer
If, on separation, the husband leaves home and later transfers ownership of his share to his former wife as part of any financial settlement but has meanwhile purchased another property, there could in theory be a capital gains tax (CGT) liability on the transfer of his share in the former home.
This is because, up to the date of separation, you can have only one principal private residence (PPR), which is exempt from CGT when you sell. There is a concession that allows the husband in these circumstances to regard the former marital home as his PPR, even if he has bought his own property, provided that he has not elected for his own property to be his PPR. So a husband and wife should seriously consider transferring any appropriate assets between them while still married, as there will be no CGT to pay on these transfers.
Pension provision
After property, the pension may be the next biggest asset. The rules, which apply to stakeholder, personal and occupational pensions, now state that pensions can be split, allowing a spouse to take part of the fund and put it into their own plan. The law changed in October 2001, when the courts would no longer discriminate between the breadwinner and the homemaker.
Sharing out a pension can be extremely complicated. If deemed appropriate, the most straightforward way is to divide the couple's finances and not touch the pension, but to make provision for other assets that could offset the value of the pension to the ex-spouse. The partner without the pension could end up with more than their fair share of the other available assets in return for forgoing a claim on the pension.
If a pension is split after retirement, the provider will look at the size of the pension pot required to provide the income received by the retiree. It will then split this appropriately, basing its new payments on actuarial rates for the man and woman separately. As women tend to live longer and are usually younger than their husbands, this could lead to a smaller payout for them.
Timing is everything
If you have joint life policies and endowments, these can usually be transferred to a single name. With an endowment policy, if cover is not to be maintained it may be worthwhile selling it and splitting the money as you could end up receiving a larger sum than if you surrendered it. However, you should always seek professional independent advice on the most appropriate course of action.
Clever timing of maintenance payments and asset transfers can save both partners money. The key issue is CGT. Where investments form part of the settlement, the timing of transfers is critical. In the tax year of separation, the CGT exemption for transfers of assets between spouses still applies.
After you have decided to separate, the assets will be treated as though they were sold at market value, and you will be liable for CGT on any gain. It makes no difference whether your decree absolute has been issued - it's from the time you decide to separate.
The average age at divorce is 42 years for men and 39 years for women.
Source: National Office of Statistics, 2003
Split decisions
* Draw up full details of what you own, what you owe and what you earn.
* Think about every financial arrangement you made as a couple, from bank accounts (not just joint ones) to hire purchase agreements.
* Stop all joint credit and store cards.
* You are liable for your partner's debts if you took out joint loans together.
* Review any insurance policy arrangements you have made for your partner on your death. If maintenance payments are involved in any settlement, it may be wise for you to take out a life insurance policy on your ex-husband or wife's life, as these payments stop when the payer dies.
* Assign any joint mortgage endowment policy to the partner who is taking over the mortgage. If you decide to cash in the endowment, consider selling it rather than surrendering it to the life company as you could get more money this way.
* Spouses who have no pension provision of their own maybe entitled to a share of their former partner's pension.
* Check out the title deeds on your property. If the property is not registered in your name, you must register a charge on the property with the local land registry office to ensure that your spouse cannot sell the home or remortgage without your consent.
* Your will is one of the things you should review if you are splitting up. When a divorce goes through, your ex-spouse will be treated as if he or she had died on the date of the divorce. This is not the same as writing them out of your will altogether.
Seek expert advice from experienced financial advisers that understand the process and are happy guide you through.
Your property may be repossessed if you do not keep up repayments on your mortgage.
For mortgage advice you can choose how we are paid: pay a fee, usually 0.5% of the loan amount, or we can accept commission from the lender.
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Prior Knowledge
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