The government has expanded its £500 voucher scheme for couples going through a divorce or separation to reach an agreement more amicably, without going to court. However, even with the best will in the world, splitting taxes and pensions can be complicated and mistakes during an amicable split or during mediation can cause headaches down the line.
The new scheme, which ends in March, means an extra 2,440 families may receive £500 towards their mediation costs. The average cost of divorce through the courts can be as high as £15,000 once you factor in legal fees and other costs. Family mediation, on the other hand, averages less than a third of that at £2,000 to £3,000, depending on the number of sessions. It’s also a lot less stressful and confrontational.
Mediation is the easier and more cost-effective choice, but that doesn’t mean there won’t be tough decisions to make regarding finances, and experts recommend that couples seek independent financial advice before committing to anything. In fact, the sooner you speak to an independent financial advisor in the mediation or divorce process, the better.
Ben Glassman, a financial planner, partner, and head of family and divorce at Tilney Smith & Williamson says: “Getting good independent legal advice is always important, even if the parties are ‘on good terms”.
“However, we would argue that having a financial planner involved early in the process is just as important.
“Independent financial assessments can benefit both the divorcing parties, and achieve clarity around the real value of the couple’s matrimonial estate.”
Glassman added that one way a financial planner can help is to challenge assumptions for both parties as to what is best.
“The gut reaction is often to hang on to the family home, but this may not always make financial sense, especially when there are other sizeable assets to consider such as pensions,” he says.
Both partners need to understand how their divorce or separation will impact their retirement plans.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, says: “In many cases, a pension is one of the largest assets built up during the marriage – often largely in the name of one person. And if it involves defined benefit pensions, these can be fiendishly difficult to value.
“You need to understand your options when it comes to splitting pensions, to make sure your divorce doesn’t derail retirement.”
Make Sure You Consider Any Tax You May Need To Pay
The advantage of mediation is that a mediator is neutral and independent, working with both parties to reach a mutually acceptable decision. The downside is that a mediator won’t necessarily know, nor can they advise, on the most tax-efficient way to divide assets.
Reena Mistry, financial adviser at Flying Colours, explains: “While they can help split assets and provide assistance, they cannot advise you if the assets are being split in a tax efficient manner, they cannot explain the tax implications or help structure the assets post-divorce, and this is where a financial adviser can help.”
Timing is also important, as drawn-out divorce proceedings can easily straddle two tax years. Where significant sums are involved it may be worthwhile employing the services of a tax specialist.
Says Coles: “If the divorce is completed in one tax year, when you pass investments between you and your ex, there’s no capital gains tax (CGT) to pay. If you go into a new tax year, you may be liable.
“The rules on this are set to change to give divorcing couples more time, but we don’t yet know when this will kick in.
“Older couples are far more likely to have more investments, so are more likely to be subject to CGT. There are steps you can consider, like bringing transfers forward, so you will need to discuss these with your lawyer.”
There may also be issues, especially when transferring pension holdings, regarding lifetime allowances. This is the maximum in retirement savings you can build up over a lifetime before you start having to pay tax on it. The limit currently stands at £1,073,100.
Glassman says: “Ongoing changes in rules have made lifetime allowance issues anything but simple, and additional caution is needed for those getting divorced.”
It can be particularly difficult to determine if one pension is subject to “transitional protections”. Such instances include where the government has reduced the maximum allowance and some pensioners with more than that amount have been able to “protect” their pension at that amount. This then means that, during a divorce, they may not be able to place more in their pension.
Glassman continued: “Transitional protection affects both the debited and credited member, and in certain circumstances can lead to the loss of tax protection altogether.
“Understanding the interactions of these protections at divorce and the strategies that can mitigate potential tax charges can result in significant savings for both parties, even into seven figures.”
He also noted the importance of state pensions, adding: “Women especially often have gaps in their career, which could affect their state pension entitlement.
“It’s important to obtain a projection, particularly when looking to equalise the pension entitlement of the two spouses. The value of a guaranteed income of nearly £9.5k from age 66 (currently) until death is not to be underestimated.”
Looking To The Future
Family mediation often has a focus on moving forward and looking to the future, rather than blaming and looking back. This is similarly good practice to employ when it comes to finances and it may be worth seeking financial advice on rebuilding wealth following a divorce.
This might involve getting savings back on track and topping up a pension, as both are likely to be affected in a divorce.
Mistry commented: “Where once your goals may have centred on you jointly as a couple, and your assets would have been geared towards this, post-divorce it is important to revisit those goals and structure your assets according to your new status and needs.”
The divorce system itself will be changing later this year with the introduction of the “no-fault” divorce, which allows couples to divorce on the basis that their relationship has broken down rather than having to attribute its failure to one person or the other. There are several benefits to this, not least of which is the inherent lack of conflict and blame.
Nevertheless, even without (or with less) bitterness and acrimony, the division of assets can easily become a sore point – another reason that mediation, as well as sound financial advice, are essential, no matter how amicable the split.
Glassman concluded: “We know of lots of examples where a divorcing couple have outlined that they are on good terms with each other, but once they start getting into the splitting of financial assets things can quickly turn sour.”
