January 22, 2024
If 2024 is turning out to be the year that you rethink your personal life, you may be feeling positive about new possibilities, or rather daunted.
Either way, whilst separation and divorce may mean challenging times ahead, sorting out your finances is vital to ensure that you are able to move on – and to make sure that any dependents remain looked after and financially secure.
In the approach to, or the immediate aftermath of a separation, sustaining (or regaining) the life you aspire to can seem a long way off. It’s probably high on your list of priorities, though, especially if you’ve been together for a long time, or have children still living at home. Whatever your situation, seeking professional legal and financial advice early on can help you to smooth things out more easily.
Whatever the circumstances of your separation (whether you were married, in a civil partnership or cohabiting) there are several useful things that you can do to prepare for the division of your finances.
If you don’t already have one, your first step is to make a comprehensive list of all the assets that you own – jointly and individually – including properties, pensions, investments, businesses and all financial accounts. Be as accurate as possible with your valuations, and be sure to note whether each is individually or jointly owned.
Also document your regular income and outgoings as accurately as you can, to help you to clearly understand your financial position before and post-separation.
Think carefully about your post-divorce finances, and consider how some goals might need to change in the short term. If possible, start saving and budgeting in advance of a separation, but certainly as soon as you can. Remember that what you aspire to may not be precisely what you get as an immediate outcome from a divorce, but if you have a clear picture of your current financial position and your future needs, you’ll be in a more informed negotiating position – whether that’s through the courts or via mediation/arbitration.
If you anticipate needing to take out a new mortgage or other financial responsibilities, it’s a good idea to get hold of a copy of your credit report, so see where you stand. This will also give you insights into any joint liabilities which you may continue to be responsible for.
For many couples, the family home is their largest asset. Even if you have other assets, deciding what happens to the marital home is commonly a major bone of contention. Depending on your circumstances, it may need to be sold to enable each partner to take a share of any equity, or one of you might be in a position to buy out the other’s share. Some couples agree on joint ownership until certain circumstances arise – such as children leaving home, for example.
Before making a decision, it’s important to carefully consider all the financial implications. Whilst it might be tempting for one partner to stay in the family home with the children, for example, you need to fully understand whether this is financially viable whilst also allowing a reasonable standard of living for the other, and/or whether managing mortgage payments on a single income is possible.
Consulting your IFA will help you to understand your options, and the financial impact of the alternatives.
Pensions are often overlooked initially, with the division of more tangible assets being treated as a priority. However, they can also become a major sticking-point later on, particularly if one partner has significantly more in pension savings than the other (which remains common, due to the stubborn endurance of a pensions gap between men and women).
Dividing pensions can have a significant effect on your long-term financial security, particularly if you are close to retirement, or have been married for a long time.
You might be advised to consider pension sharing – which involves splitting one or more pensions between you and your former partner – or pension offsetting, where the value of pension rights is balanced against the value of other assets (such as property or savings). What works best for you depends entirely on your individual circumstances. An IFA will help you to understand the implications of different scenarios, to help you make the best decision for you.
Look at any cash savings accounts, ISAs and other investments. Splitting cash savings, once you have agreed on the split, is a fairly simple process of transferring cash. But dividing ISAs and other investments may be more complex. It’s important to understand that there may be tax implications, so before doing anything, consult your IFA so that you can be confident that any agreement you reach is appropriate and as financially beneficial as possible.
It’s possible that asset transfers during a divorce can incur CGT. Since April 2023, the timeframe for transferring assets without attracting CGT has increased to up to three years from the end of the tax year in which you separated. However, since financial arrangements post-separation and divorce can take a long time to agree, and may sometimes require review in the future, it’s worth bearing in mind and taking professional advice.
Don’t forget that as you enter a new stage of your life, the need to protect yourself and your family from the unexpected may have changed. If you have taken on a new mortgage, or are now taking responsibility for a family on a single income, you might also need to review whether you have sufficient cover in place. There is no one-size-fits-all solution, so it’s important to talk to your IFA and review any cover you have in place to ensure it still gives you the protection you need. This could take the shape of life insurance, critical illness cover, or income protection – particularly important if you are self-employed.
If you don’t already have an independent financial adviser, it could be time to think about finding one. The right IFA will help you determine your aspirations and goals, and create a plan for getting you there, even if it feels challenging right now.
At Talis IFA, we take a ‘life first, money second’ approach, so our recommendations are based on developing a deep understanding of your current situation and future plans – whether that’s focused on your immediate future or ensuring your financial security later on.
Because we’re fully independent our advice is always completely objective and focused on what will work best for you.
To discuss your plans, get in touch with one or our Talis Independent Financial Advisers.
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