The world of divorce is intricate and complex and the impact on your finances can be profound. The divorce rate in the UK has been on the rise and there were 113,505 divorces granted in England and Wales, an increase of 9.6 per cent from 2020, according to the Office of National Statistics (ONS).
Divorce can affect various levels of personal finances from dividing assets and property to future income support and savings. Here, Investors’ Chronicle takes you through everything you need to know about protecting your finances when getting divorced.
The mortgage dilemma
If you or your spouse happen to be proud homeowners, well, buckle up because it’s likely to be shaken up by divorce.
Two notable legal cases are important: the 2006 cases of Miller vs Miller and McFarlene vs Mcfarlene. The courts ruled that the home has a unique place in the marriage which means that the family home is a major financial asset.
Some 1.6mn homeowners have refinanced fixed-rate mortgages this year and now face an average increase in their annual mortgage bill of around £2,300. Even at mortgage rates peak, reaching a reasonable agreement with your ex-spouse is important.
What happens to the home, depends on a range of factors and every case will be unique – emphasising the UK’s bespoke system when it comes to divorce, often criticised by family law practitioners
Courts hold the power to make property adjustment orders, which means they can transfer the home to one party or the other, order the property to be sold or keep the home, and not change who owns it.
For example: Mr and Mrs Smith have filed for divorce but they are on a joint mortgage. Generally what would happen here, is the mortgage would be transferred from one party, although it would depend on whether the lender will refinance with one party. The court will take into account the mortgage capacity of each party to create a bespoke package. Let’s say Mr. Smith has never worked, so he doesn’t have any mortgage capacity, which then limits his chances of taking charge of the mortgage.
But one important consideration is taken into account, according to Sarah Scriven, senior associate at Stowe Family Law. “First consideration will always be given to the welfare of any minor children of the family.” In addition, the court looks at the length of the marriage, the financial position of each party, and the standard of living in the marriage.
Future monies
The issue of future income support is complex. When it comes to future earnings, the issue came into the limelight in the 2018 case Waggott vs Waggott where the wife argued she should be entitled to a share of her husband’s future earnings as they were an asset acquired during marriage.
She said she had sacrificed her career and relocated for her husband. The court ruled in favour of the husband and said future income should not form part of the matrimonial assets.
However, they could be taken into consideration when calculating spousal maintenance payments. “The purpose of spousal maintenance is to put the financially weaker party back on their feet,” says Scriven. “In every case, we’ll consider how the parties can achieve financial independence as early as possible.”
But narrowing down how much is paid to the parties is not so easy as Emma Bell, a divorce lawyer, says. “It is as a family law practitioner, the hardest thing for us to determine and for us to advise on because of the range of potential orders in terms of how long maintenance is paid for and how much is paid,” she adds.
What the courts need to see is financial independence by looking at the needs of all parties. Spousal maintenance payments are the most sensitive issue for the payer. “They’re having to pay their ex-spouse years into the future,” says Bell, “It’s also the most vulnerable part of the order for the person receiving the payment because you are relying on someone to pay.”
What happens to my savings
Savings are considered a matrimonial asset so they will be relevant for dealing with finances. “It might be possible to argue that savings should be excluded if they’ve been accrued outside the marriage, but that’s very much dealt with on a case-by-case basis,” says Scriven
Once again it depends on need, it’s all about making sure no party is worse off. So the aim usually is to get a 50-50 split.
Savings accrued before the marriage might be excluded from the settlement. For example, if you have £3,000 before the marriage and you have not taken or added to it on the day of separation, that £3,000 would form part of your matrimonial assets.
Some savings are classed as windfall and are excluded from the settlement. For example, gifts and inheritance are excluded.
How to get your finances divorce-ready
“The first thing is to know what you have as a couple, know what is in your name and know how to access it,” says Bell. “Number two is to speak to your partner about what they’ve got.”
So financial disclosure from both parties is pertinent as it gives you a clear picture of where you are financially compared to your ex-spouse.
Myron Jobson, senior personal finance analyst at Interactive Investor said: “It is important to have a comprehensive understanding of your income and expenses. Income isn’t just your salary, but everything you have coming in. It can include any benefits you are receiving, interest on savings, or even money you make by selling things online.”
So a good rule of thumb is to have 12 months of bank statements, evidence of savings of liabilities, the last three payslips, pension statements, and information about any businesses.
And that’s not all. You’re most likely to also get a big legal bill. You don’t want to come out at the end of divorce proceedings with no money to yourself thus knowledge of all aspects of the process is key.
