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 Smith & Williamson

Tilney Smith & Williamson is the UK’s leading integrated wealth management and professional services group, created by the merger of Tilney and Smith & Williamson on 1 September 2020. With £54.8 billion of assets under management (as at 30 June 2021), it ranks as the third largest UK wealth manager measured by revenues and the eighth largest professional services firm ranked by fee income. The Group currently operates through three principal brands: Tilney, Smith & Williamson and online investment service Bestinvest. It has a network of 28 offices across the UK, as well as the Republic of Ireland and the Channel Islands. Through its operating companies, the Group offers an extensive range of financial and professional services to individuals, family trusts, professional intermediaries, charities and businesses. It is uniquely well-placed to support clients with both their personal financial affairs and their business interests. Tilney Smith & Williamson’s personal wealth management services include financial planning, investment management and advice, online execution-only investing and personal tax advice. For businesses, its wide range of services includes assurance and accounting, business tax advice, employee benefits, forensic advice, fund administration, recovery and restructuring and transaction services.