Can you have a good divorce?
Anyone who has experienced or observed the fallout from a divorce knows how traumatic it can be. But while the emotional upset is bad enough, it's made much more complicated and painful by the practicalities of dividing a single household into two financially functioning units.
"Typically, when a family splits up, there's not enough to go round - they've got a house with a big mortgage on it, they've been spending what they earn - so it's a matter of making the best of a difficult situation," says Nigel Shepherd, a partner at law firm Mills & Reeve and member of the family law association Resolution.
However, the English legal system does not take a formulaic approach to the division of assets. A 50/50 split may be a starting position for negotiation (particularly for wealthier couples), but more typically couples will start from what each thinks is fair and try to come to an agreement from there.
When couples can't agree and the court is asked to decide on a fair split, it has the freedom to tailor apportionment to each individual family's needs, with housing requirements and the children's welfare top priorities.
Shepherd says courts in other countries and jurisdictions take a much more prescriptive line. The Scottish system, for example, works on a 50/50 split of everything that has been accrued during the marriage and pretty limited maintenance. "That provides greater certainty of outcome, but it tends to work against the spouse in the weaker position - so if 50% of the assets isn't enough for a home, that's hard luck," he explains.
For divorces in England, where the court is involved, its decision will be based on what is fair, taking into account a menu of factors. These include:
- the ages of both parties and how long they were married (a straight split is typically easier for younger people with fewer possessions who have been together a short time, but tough for those married for decades, where one partner has perhaps given up a career to raise a family and every aspect of their finances has become closely entwined).
- each partner's financial position now and employment/income prospects for the future.
- the standard of living of each when they were married.
- any disabilities.
- contributions (financial and non-financial) to the family welfare.
- the value of any state benefits lost on divorce.
- Blame and partners' conduct (such as an affair) is rarely taken into account in determining how assets should be split.
There are various elements to consider, including housing, investments, pensions and maintenance payments. Importantly, in English law, any assets, including those inherited or brought to the relationship, could potentially be part of the equation unless they are covered by a pre-nuptial agreement.
The final settlement is very likely to involve trading off one asset for another in some way. The ideal aim, says Nigel Shepherd, is a "clean break", where everything is split (or traded) and the two partners can walk away from each other with no further ties or obligations.
The family house is often the most valuable asset on the table and therefore tends to be the biggest bone of contention. Moreover, says Lisanne Mealing, a financial planner and managing director at independent financial advisor MDM Associates: "At a really traumatic time, one partner may be very keen to retain the security of the family home, especially if children are involved or if they were not the one who instigated the divorce."
Mealing tells of a recent case where one partner wanted to keep the house and the other didn't mind leaving, but the trouble was that there were no other assets to trade against it. "In the end they agreed to a year's delay on the settlement so that she could try and raise the money to buy the other partner out," she continues. "Another client raised cash from her business so that she could keep the house. People may trade their claim in their partner's pension. They have to come up with a plan."
Given the emphasis on any children's wellbeing, the main carer may expect to be able to keep the house - but that won't always happen. If there's insufficient cash to support two households unless the family home is sold, a court may take the view that a sale is necessary so that the proceeds can be divided (not necessarily 50/50) to give each partner a chance of a new home.
These are the easiest assets to divide, being liquid, easily accessed and generally without emotional significance.
Pension funds can make up a large chunk of the total wealth of couples, those in their 50s and 60s particularly, so the issue of how to treat that wealth is a crucial one. Interestingly, says Shepherd, pensions tend to be a less contentious issue than the family home: "They seem much less immediately relevant and therefore easier to give away."
By far the most common solution these days is "pension sharing", whereby a proportion of one partner's pension is transferred into a plan in the other partner's name.
"Typically, once it's been decided that pension sharing will take place, I'm brought in to discuss the options - whether the transfer can remain in the same pension scheme but under the recipient's name, or whether it will mean a transfer to an external personal pension," explains Richard Wadsworth, a specialist financial planner with Carbon Financial Planners.
"Generally, if it's a final-salary scheme, the best option is to become a member of that scheme, because it will offer a guaranteed income and will probably be more generous. But final-salary schemes are increasingly unwilling to allow ex-partners to remain in the scheme under their own name."
Small pension pots, where splitting the income is not worthwhile, are more likely to be offset in their entirety against other assets - typically the house, says Mealing.
Divorce usually involves an increase in expenditure because you're running two households instead of one - but there's no corresponding increase in income. Spousal maintenance payments may therefore be required to ensure both partners can cover their outgoings. (It will stop if the recipient remarries.)
Spousal maintenance is not inevitable, however. If the marriage was short and there are no children, there may be no maintenance to pay, or payments may only last a short time. Alternatively, the asset split may be adjusted to "off-set" maintenance due and enable a clean break. After a long marriage, where the person receiving the maintenance does not have a job, maintenance may have to be paid on an open-ended basis.
Shepherd says current principles are under review and spousal maintenance awards are likely to be substantially reined in by the Law Commission in future.
Various sources of information and guidance about divorcing are available online, including resolution.org.uk, divorce.co.uk and the Money Advice Service.
Tips for splitting couples
Richard Wadsworth offers the following advice for divorcing couples trying to divide their assets:
- Be realistic - you will probably be worse off financially as a result of this break, so review your household budget.
- Be pragmatic - you have to settle one way or another, so try to focus on finding acceptable compromises.
- Don't panic - if you've not been much involved with household finances before, allow yourself time to get up to speed.
- Don't be afraid to ask - quiz your IFA when you don't understand something. "Our job is to go at the client's pace, and in wider terms it involves a lot of coaching and education over the longer term," says Wadsworth.
- Look ahead - try and visualise your new life. Might you be able to go out and earn or get a better job? Is your business thriving? May you be due an inheritance? A sense of the future is useful in striking the right balance between allocating capital and income to supplement existing earnings. "You only get one shot at dividing your assets, so make sure you've got your priorities and choices right," says Wadsworth.
This feature was written for our sister publication Money Observer
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