The financial implications of divorce

05 May 2021

This week, one of the richest and most powerful couples in the world announced their intention to divorce and are reported to have agreed a ‘separation contract’ on the division of their assets ahead of announcing their split. Bill and Melinda Gates have been married for 27 years and have a net worth of $124bn, so however they have decided to split their assets, it is unlikely that either will find themselves destitute in the future. However, for many other couples facing the prospect of separation, the financial implications of a decision to end a marriage are significant. The emotional trauma of a divorce can be matched by the financial implications. While many couple are quick to get lawyers involved, it also makes sense speak to a financial adviser too.

Below, Gary Smith, chartered financial planner at Tilney Smith & Williamson, highlights some things couples need to consider during a divorce.

“For some couples, the pressure of spending considerable time together during repeated COVID-19 lockdowns have proven too much on strained relationships. Divorce rates are therefore reported to be surging across the UK.

“Untangling finances during a divorce is complex and decisions made at the time can have huge and long-lasting consequences for you and your finances. Often, decisions are made in an emotionally charged environment and the realities of these financial decisions don’t become apparent until much later on.

“Divorce usually involves reaching an agreement on a range of different assets to create a split that meets both you and your ex partner’s needs and makes financial sense. The assets very rarely amount to cash in the bank, so here are some things that may come into play.

“The marital home - People’s gut reaction is often to hang on to their home when getting divorced, especially where children are involved. This can mean making decisions over existing or new borrowing, but keeping the home doesn’t always make financial sense when taken into context with other existing assets.

“Pensions - A pension can be one of the biggest financial assets that a person has, so it’s important to take them into account when agreeing a divorce settlement. Often, this can be complicated and it’s an area where good financial advice at an early stage makes sense.

“In recent years we have also seen a rise in the number of ‘silver divorces’. Pension plans often form either the first or second (after property) most valuable asset for those in later life and therefore careful consideration of how this should be dealt with should be given, especially when neither party is in employment. This can be tricky as what might be best for one party doesn’t necessarily suit the other and therefore getting an equitable outcome is often difficult.

“Savings and investments - In the same way that pensions are usually included in a divorce settlement, so are savings and investments. In Scotland, it is usually only the savings and investments built up during a marriage that matter, whereas the courts in England, Wales and Northern Ireland generally take all of them into account.

“Life assurance - Married couples will often have joint life policies in place and after divorce these could be cancelled or assigned to one of the divorcees as part of the settlement. However, this could be an issue if one of the divorcee’s health has suffered and they can’t get replacement life cover. Furthermore, one area that is often is overlooked, is the event that the ex-spouse has to make maintenance payments for children, until they are financially independent (typically their 18th birthdays). These maintenance payments can only be made if the ex-spouse survives so, as part of a divorce settlement, discuss putting in place life cover that would ensure that the payments would continue to be made, even on the ex-spouse’s death.

“Business assets - Business owners often don’t realise that their ex – even one who has never got involved with the business – may be entitled to a share of the business on divorce. The court takes into account all assets and is unlikely to make a distinction between business and other assets unless there is legal paperwork to show otherwise.

“A family court is likely to try hard not to disrupt a business but at times they do decide that the only way to divide assets is to break it up or sell it. This can be devastating and have profound financial implications for business owners. Divorce can also lead to one party buying out the other. A financial planner can help you understand your options and make informed decisions about your business at the time of divorce. 

“Will - Make sure that your Will is updated immediately. If it isn’t changed, the assets could pass to the spouse on death prior to the divorce being granted. You might also want to put in place a Power of Attorney so that decisions can be made in case they become incapacitated prior to the divorce being granted.

“Divorce is a very emotional and difficult thing for anyone to experience, but it is vital you know your rights and entitlements. It is therefore extremely important to speak to your adviser.”

For more information about the financial implications of divorce, please see our guide.

About Tilney

Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years. Our clients are private investors, charities and professional intermediaries who trust us with over £24 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.  We have won numerous awards including Wealth Manager of the Year, Best Discretionary/Advisory Wealth Manager, Best Low-cost SIPP Provider and Best Investment Platform 2018 as voted by readers of the Financial Times and Investors Chronicle; Best Advisory Service in the 2015 City of London Wealth Management Awards; and Investment Award – Cautious category in the Private Asset Management Awards.

Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.