Divorce can be one of life’s most stressful and destabilising events. Psychologically, the death of a spouse is the only experience regarded as more difficult. Given the upheaval involved, it is not surprising that financial mistakes are often made – sometimes haunting people for years.
At Elmfield, our financial advisers want everyone to avoid that outcome. Below, we explore four major financial traps individuals often fall into during divorce – and, more importantly, how to avoid them. If you live in or around Burnley and want financial advice, please get in touch.
#1 Neglecting pensions
Pensions are typically the second-most valuable asset in a household (after the equity held in the home). However, they are often forgotten about during divorce cases.
Indeed, spouses could be missing out on up to £665,000 by overlooking pensions. Women, in particular, are more likely to keep the family home in a divorce case, giving up valuable pension arrangements in return. This can often be a costly mistake.
Your future retirement income may feel less important than immediate financial concerns when going through a divorce. However, a balance needs to be struck between present and future needs. A lawyer may not have a sufficient grasp of these issues. By also bringing a financial adviser on board, you can help protect both your legal and financial interests.
#2 Borrowing & credit
Divorce can wreak havoc on your credit health if joint debts and borrowing arrangements are not addressed properly. Many couples have joint credit cards, mortgages or loans. When one party assumes the other will pay (or refuses to), both individuals’ credit files can suffer.
You are not automatically absolved of shared debts when you divorce. For instance, if your name is on a credit agreement, you remain legally liable even if your ex is supposed to repay it. Divorce agreements do not necessarily bind lenders.
Another common issue (post-divorce) is borrowing capacity. If you now only have one income in the household, and possibly lower creditworthiness, this could present challenges later – e.g. when seeking a new mortgage or personal loan.
To protect yourself, consider closing joint accounts or converting them to individual accounts. Look into filing a financial disassociation to unlink your name from your ex-spouse on credit files.
#3 Tax implications
Divorcing couples often overlook the tax consequences of transferring or selling assets. Notably, capital gains tax (CGT) can trip many people up.
If two people give (or otherwise “dispose of”) assets to each other whilst still married or in a civil partnership, there is no CGT to pay. However, if these actions occur after the finalisation of the divorce, CGT may be due.
Transfers between spouses are tax-free (on a “no-gain/no-loss” basis) up to three tax years after the tax year that they stop living together. As such, timing is key when deciding upon tax-efficient asset restructuring in a divorce case.
Engaging a tax adviser early in the separation process can help you understand what assets are best transferred, sold or retained (and when). On a related note, be mindful of Stamp Duty Land Tax (SDLT) on property purchases after divorce. This is sometimes forgotten about, and you may qualify for relief and exceptions under certain conditions.
#4 Protection
Divorce can leave many people financially vulnerable or destabilised. As such, it is especially important to lay out an appropriate safety net in case things go awry. Your former protection plan as a married couple or civil partnership may no longer be suitable to your needs.
For instance, life insurance, income protection, critical illness cover and even home insurance may have been structured jointly. As such, after a divorce, these would likely be out of date or no longer suitable for your new circumstances.
Take time to examine your policies and get professional advice if updates are required. Notably, check your life insurance to see if your ex-spouse is named as the beneficiary.
If you have children, consider what might happen if a paying parent dies or becomes critically ill. Do you have proper cover available for child maintenance obligations in such a scenario?
If you are a newly single primary carer, do you need income protection if you are suddenly unable to work due to illness or injury?
If you’ve moved or taken new possessions, make sure policies reflect your current situation. Do you need to update your home and/or contents insurance?
Working with a financial adviser during (or after) ensures your protection plans are recalibrated to reflect your new life, responsibilities and budget.
Are you (or someone else) going through a divorce and need financial peace of mind? Please get in touch to speak to one of our advisers about taking the right steps to safeguard your financial future. We’d love to discuss your goals with you!
Please note:
Your capital is at risk. Investments can go down as well as up. Past performance is not indicative of future results. Tax treatment depends on individual circumstances and may change. This content is for information only and not investment advice. Any decision to invest is the reader’s own. Diversification is key to managing risk. Market volatility affects investment values. Inflation erodes savings. Liquidity risks may prevent quick access to funds.
