Divorce is often a difficult and emotional experience, and it’s often accompanied by a great deal of uncertainty. Not only do couples need to untangle their shared lives but they also have to navigate complex financial issues such as asset division and budgeting going forwards, which often one person will have taken a lead role. This can leave the other with some catching up to do.
Financial planningfor divorce can help to provide clarity. With a plan in place, you’ll be better equipped to make rational financial decisions, helping to steady the ship and creating a path towards long-term financial security.
Understanding your finances
When financial planning for a divorce, it’s a good idea to start by conducting a comprehensive financial inventory detailing your assets, liabilities, income, and expenses, along with those of your partner.
Having all your financial information in one place will give you a clearer sense of your financial outlook and lay the groundwork for informed decision-making. It will also help in identifying potential financial vulnerabilities.
When noting down your assets, remember to include pension accounts. These can be one of the largest assets a couple has.
It’s also important to consider business assets. Even if you’ve never been involved with your partner’s business, it’s an asset like any other and needs to be considered.
When conducting a financial inventory, it can be worth speaking to a financial planner to understand the assets you hold and the options available. They can also assist with strategies and demonstrate what this or that settlement might look like over the coming decades using advanced cash flow modelling software to give you confidence in your financial future.
A financial planner will also be able to help you create a balance sheet of joint and individual assets with up-to-date valuations before you attempt any of the divorce forms which may be perceived as positional when you’re trying to sort your finances amicably.
Navigating asset division
Once you have detailed all your assets, you can start to think about how you might split them. When financial planning for divorce, the starting point is usually 50-50 although there are many other considerations. Not everything is easily liquidated to provide a cash share, and consideration needs to be given to any other consequences such as potential taxation. Again, a financial planner can add value here. They will be able to explore creative asset division solutions and ability to raise finance to maximise financial security for both parties. A planner will help you explore creative asset division strategies. They will explain the trade-offs involved in each approach. Your planner can also model different settlement scenarios and show how they could affect your long-term financial future.
There may be a distinction between matrimonial assets and non-matrimonial assets, particularly in larger divorce settlements. The length of the marriage may also be a consideration.
We have access to a wide range of lawyers and mediators to help you formalise a settlement on a constructive way using the most up to date approaches such as one lawyer, two client approaches.
Dividing pensions in divorce
In terms of pensions, there are three main ways that pensions are dealt with upon divorce.
These are:
- Pension sharing, where you split one or more pensions.
- Pension offsetting lets you balance pension rights against other assets, such as property or investments.
- Pension attachment means a portion of your pension benefits is paid to your ex-spouse when the scheme pays out.
How you deal with your pensions can have lasting consequences for your financial future, so it's crucial to understand your options fully. Speaking to an expert helps you make informed, confident decisions.
Preparing for tax
When dividing assets, it’s crucial to think about tax, both now and in the future to optimise your assets.
It’s worth pointing out that ISAs can be complex from a tax perspective. ISAs are individually held and cannot be transferred between spouses upon divorce. To divide ISA funds, they must first be withdrawn—resulting in the loss of your tax-efficient wrapper.
It’s also important to consider Inheritance Tax (IHT). Transfers between spouses are exempt from IHT until the final divorce order is issued. After that point, any transfers are treated as Potentially Exempt Transfers and could attract IHT if the individual dies within seven years.
Given these tax issues, divorcing couples should think carefully about the split of their assets and seek advice from experts to minimise the tax cost of their separation.
Protecting assets
When it comes to protecting your assets, the best strategy is to be prepared.
In the event of a divorce, family members often have concerns about what will happen to money that has been gifted from one generation to the next. Monetary gifts or loans from family members usually have little protection when couples divorce.
Trusts can also be an effective way of protecting family wealth. These can be used to ensure that money goes to the intended beneficiaries. Trusts can be complex, however, so it’s important to consult an expert when setting them up.
Restructuring budgets and managing cash flow
When people get divorced, they often wonder if they’ll have enough money in the future. This is understandable, as one’s income and expenses can change significantly after a separation due to splitting the assets of one home into two separate homes.
One area of financial planning that can be useful here is cash flow modelling. This can help determine how long your money will last and show you what your life could look like financially in the future. It can be quite valuable in the lead up to a divorce settlement as it can help you make sense of different scenarios and develop realistic budgets for the future.
It’s common these days to share the responsibility for children post-divorce. This means that spousal maintenance or child maintenance may not be a feature, but if it is, a financial planner can factor it into your projections and also look at ways of protecting this in the event of an untimely death.
How Bowmore can help with financial planning for divorce
Untangling finances during a divorce is challenging and decisions made at the time can have significant and long-lasting consequences. It’s therefore a good idea to speak to an expert when planning financially for divorce. An expert will be able to help you navigate the financial complexities associated with divorce, make well informed decisions, emerging with your long-term security intact.
At Bowmore, we have a lot of experience in this area of financial planning. We understand the challenges that you are going through, and we can help you tackle them, whether they are related to cash flow and budgeting, asset division, retirement planning, or tax.
If you’re looking for information on financial planning post-divorce, take a look at our other blog: A guide to financial planning after divorce.
Want to find out more about how to make the most of the money you have, and how to enhance your financial security? Get in touch with us today.
Regulatory Information
- Bowmore Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority
- Bowmore Financial Planning Ltd is not regulated to provide tax advice
- The Financial Conduct Authority does not regulate cash flow Planning.