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February 28, 2024

The value of financial advice following a divorce

Something that we often don’t like to think or talk about, but is unfortunately quite common, is divorce – at which point the right legal advice is a necessity.

But many of those who do decide to leave their marriage will do so without seeking appropriate financial advice – despite the fact that many of the decisions made during what is an incredibly difficult and emotional time, may have significant, longer-term repercussions for those involved.

This month we take a look at some of the things that should be considered if you or anyone you know should find themselves in this position.

Matrimonial property

First thing’s first, create a comprehensive list of all your assets (and liabilities).

Don’t forget that, in Scotland, matrimonial property is defined as any property, cash and assets accrued by either spouse during the marriage, irrespective of who actually purchased or owns it.

This can include:

  • The family home and other properties bought during the marriage.
  • Savings, investments, or pensions built-up during the marriage.
  • Household items and personal possessions.
  • Debts incurred throughout the marriage (e.g. mortgage, car loan etc).

Scots divorce law is based upon the principle that such assets are divided fairly – so both parties involved in the marriage or civil partnership will have an equal claim to eligible assets.

Any assets acquired  before marriage, or after separation, are usually not considered as matrimonial property.

However, there can be exceptions to this rule. For example, if an asset is acquired in advance, but is intended to be used by the couple during the marriage, then it will be treated as matrimonial property and subject to division upon divorce.

Dividing the home

Although often difficult to do, it’s important to strike a balance between the financial and emotional aspects of dividing the family home.

Residential property is often one of the single most valuable assets that we possess and it can be full of memories from happier times. It is a place where you have lived, rather than simply a financial asset.

However, whilst the value of the property can often be considerable, it is also illiquid.

Careful consideration is therefore required around the longer-term financial implications of retaining your home as part of any settlement. Can you afford to maintain the house and your standard of living at the same time? What about other assets, designed for your future, that you might off-set against the value of the property? What impact will this have? How will having less liquid assets affect your day to day lifestyle?

It is important that some degree of objectivity is maintained – which is of course difficult in such circumstances. Seeking professional advice is therefore essential.

Don’t ignore pensions

Along with the family home, pensions can sometimes be the highest valued assets in the divorce process, and decisions that you make in the short-term can have a far-reaching impact upon your future financial health.

In Scotland, only the value of the pensions that you have built-up during the period of marriage or civil partnership is considered. Accrual before or after the marriage or civil partnership is not included.

When creating a settlement, pensions can be taken into account by one of the following ways:

Off-setting

The value of any pension is offset against other assets. For example, in exchange for you keeping a personal pension, your ex-partner would receive an equal share of other assets. The pension benefits are valued as a lump sum value in today’s terms. This approach is only possible if there are additional, alternative assets of sufficient value to off-set.

Pension sharing

This approach involves splitting the pension at the point of divorce.

The recipient receives a share of the pension benefits which are then transferred into their name as a pension “credit” (with the ex-partner having a pension “debit”).

The recipient might, in some cases, be able to choose whether to keep their pension in the existing scheme or to transfer it to a new pension. It depends upon what options are available within the scheme.

With death or re-marriage having no impact on pension-sharing, and certainty given at the time of divorce in terms of what value of the pension will be kept of received in the future, this approach can be considered as a “clean break”.

“Ear marking” (otherwise known as an attachment order)

This approach would allow the ex-partner without the pension to receive a proportion of the income and/or lump sum payments from the scheme, in the future.

Such agreements might also stipulate that some, or all, of any survivor pension (and/or lump sums payable on death) must be paid to the ex-partner following the death of the pension scheme member.

However, it is worth remembering that there are some potential drawbacks for those who are recipients of an “ear-marking” order, including:

  • The recipient will only start to receive the ear-marked share of the pension when the ex-partner chooses to take their benefits, or dies.
  • The ex-partner has full control over any investment decisions made in relation to the pension funds.
  • If the ex-partner dies or the recipient re-marries, the future right to ear-marked pensions may be lost.
  • If the ex-partner decides to take the pension benefits earlier than originally intended or stops funding the pension, the recipient might get back less than planned for.
  • As the scheme member, the ex-partner would still pay income tax on the full value of the pension income paid by the scheme, even if some of the income is received by the recipient as part of “ear-marking” (who pays no income tax). This might cause a potential issue when the ex-partner is at a higher rate of income tax than the recipient.

Get impartial financial advice

As your future becomes clearer, it is important to understand both your current and future financial position.

What does your new, financial life look like and what is needed to be done to not only protect your current standard of living, but also your future plans?

Also, don’t forget that you might need to take into account existing investments in any eventual settlement. It is therefore important to consider market timing, available allowances and tax implications.

Rest assured we can help you with these complexities to ensure you benefit from an appropriate outcome.

Using our services will compliment the work undertaken by your solicitor, looking at your current and future situation objectively, helping you every step of the way to happier times.

February 28, 2024