Finances are a significant factor in couples choosing to stay together, even if they are unhappy. After years of combined finances, the prospect of going it alone can be daunting.
When you finally make the decision to divorce, you will have a lot to think about. It’s a good idea to understand the financial implications before you start proceedings so that you can reach a fair outcome.
Define Your Budget
With only one income in the household, you will need to think carefully about your budget and expenditure. While you might spend less on certain items, such as food, council tax, and travel, your bills probably won’t reduce significantly.
If you are the main breadwinner, you might expect to have more disposable income. But if your former spouse was reliant on your income, the court might issue a maintenance order, requiring you to continue providing them with financial support. This would apply either for a fixed period or until one of you remarries. It might also be reassessed if your income changes.
You would also need to pay child maintenance for any children not living with you full-time.
If you had a lower income than your spouse, you might be entitled to maintenance, but you shouldn’t rely on it. Even in the case of amicable divorces, finances can be contentious, and a change in circumstances could mean that maintenance payments are stopped. Increasing working hours might be one option, but it isn’t always practical due to caring responsibilities or health.
If you are concerned that you won’t have enough money to live on, you can check Entitled To to work out if you are eligible for any benefits.
Split Your Assets
Most couples agree on a split of assets without going to court. You might decide to split everything down the middle, or make adjustments for any assets owned before the marriage.
Sometimes the concept of a fair split can be a tricky one. The higher-earning spouse might have more in savings and pensions but must also take into account whether their partner helped enable them to earn enough to do this, for example, by taking time out of their own career to raise children.
If you can’t agree on a split, you can leave it up to the court to decide. This can be a lengthy process and will incur legal costs. With solicitors involved, both sides will be pushing for the best deal, which can turn an amicable divorce into a difficult one.
The court will take into account things like expenditure and standard of living, as well as each spouse’s age and capacity to earn more money. It will also take into account financial responsibilities and parental roles. Assets built up before marriage are also considered.
The goal is usually to achieve a clean break so that there are no ongoing financial obligations and each party can move on without ties.
Decide on Living Arrangements
You will need to think about what will happen to the marital home.
If you don’t have children, the simplest option might be to sell the property, or for one partner to buy out the other.
Where children are involved, it can be more complicated, as most parents want to keep disruption to a minimum. Children normally stay with their primary carer, who is often not the higher earner.
Maintenance payments can help ensure that children can stay in their home, although sometimes the only option is to downsize into two smaller properties.
It’s worth seeking mortgage advice if you are looking to buy a new home, as you probably won’t be able to borrow as much on a single income.
Check Your Pension is on Track
Pensions can form part of the divorce settlement. This might mean that some of your pension is transferred to your spouse, or that they receive a higher share of the other assets to compensate.
If you are on the other side of this arrangement, sometimes it can seem like a good idea to allow your ex-spouse to keep their pension in exchange for full ownership of your home. This might give you more stability in the short-term, but will limit your options in retirement.
It’s a good idea for both spouses to request a projection of retirement benefits following the split. It might be worth increasing your contributions if you can afford to.
If you have multiple pensions, you should track them all down and confirm an up-to-date value. You might even want to consolidate them into a single pot for simplification. A financial adviser can help you with this.
Don’t forget the State Pension. If you have worked throughout your marriage, or received Child Benefit, you should be on track to receive a full State Pension. If you are not sure, it is worth checking this, as you might be able to make voluntary National Insurance contributions to top up your record.
Allowances and Exemptions
There are a few tax benefits of marriage that will be lost when you get divorced. For example:
- Marriage allowance, which allows you to transfer up to £1,260 of your personal tax-free allowance to a spouse who pays basic-rate tax.
- Any assets that are transferred to a spouse are ignored for Capital Gains Tax purposes. This gives a joint annual exemption of £6,000 (£3,000 each), which can reduce your tax when selling assets at a profit.
- When you die, your ISA can pass to your spouse without losing tax benefits.
- Joint estates benefit from a joint nil rate band of £650,000 on second death, which can reduce Inheritance Tax. Single estates have a nil rate band of £325,000.
- The Residence Nil Rate Band works in a similar way, with up to £350,000 available for joint properties and £175,000 for solely owned properties. This is subject to you having a direct descendant to pass your main property on to. E.g children, grandchildren etc
You should think carefully about how losing these tax benefits will impact your financial plan, and seek advice where required.
Review Your Will
Your Will remains valid when you divorce, but with one important change. Your ex-spouse might be excluded, both as a beneficiary and executor, unless you specify otherwise.
If you are on good terms with your ex, you might still want to include them in your Will, although maybe not to the same extent.
Alternatively, you may be happy to exclude them, but you should take some time to think about what you would like to happen instead.
Legal advice is recommended, particularly in the case of second marriages and blended families.
Common Law Marriages
It’s worth pointing out that if you live together but are not married, you do not have any of the legal protections or obligations that marriage brings.
While the same rules apply regarding child maintenance and joint assets being split, unmarried partners do not have any claim to their ex-partner’s assets or income. You may wish to seek legal advice or contact Citizens Advice if you are concerned about the financial impact of a split.
The breakdown of any relationship can be traumatic, but by getting a clear handle on your finances, you can start to heal and rebuild.
Please don’t hesitate to contact a member of the team to find out more about financial planning.
The Financial Conduct Authority does not regulate Will writing
The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.
The content in this article was correct on 28/10/2024.
You should not rely on this article to make important financial decisions. Teachers Financial Planning offers advice on savings, pensions, investments, mortgages, protection equity release and estate planning for teachers and non-teachers.
We also offer advice on wills, trusts and estate planning. The Financial Conduct Authority does not regulate wills, trusts and estate planning.
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