OpinionJan 15 2018

How to avoid the financial pitfalls of divorce

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How to avoid the financial pitfalls of divorce
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The first working Monday of the year has been dubbed ‘Divorce Day’ by lawyers.

This is due to the sudden influx of married couples making enquiries about divorce after what can sometimes be a stressful festive period.

A recent survey by law firm Slater and Gordon revealed that money worries are the number one reason for break-ups, leading to one in ten married couples ending their marriage through divorce.

At often an incredibly difficult time, thinking about finances might be the last thing a client wants to do, but it is important to know how to avoid any major pitfalls.

Our analysis found that adults who are divorced or separated are twice as likely to have no savings or investments compared with those who are married (32 per cent vs 14 per cent).

It’s not uncommon for one person to be in the driving seat of the family finances. So, when it comes to divorce, not only is it important for clients to be aware of financial settlements, but also to have a reasonable financial plan for the next chapter in their life.

Understanding the impact on pension rights and making plans for future independent provision will be important.

Thinking about credit scores, it’s surprising how many financial products and agreements individuals often share with partners, from a mortgage and credit cards right down to utility bills.

The longer couples have been together, the more tightly wound up even their basic finances will be.

Credit reports will list the details of every financial agreement they have, and this will help to protect their credit score from unexpected payments on the part of a former spouse.

Clients will need to build up their own independent score and improve their rating if needed to ensure they don’t get turned down for any future loans.

Leading on from this, it is important to make sure that all joint credit cards and accounts are closed and paid off in full or, at the very least, changed to the client’s name or that of their former partner’s.

Not doing so could complicate matters, or could even lead to them using accounts, running up debt or using savings.

For clients who have just been through, or are currently going through a divorce then a pension is probably going to be the last thing on their mind.

However, after the family home, a pension can actually be the biggest asset at stake, so understanding the impact on pension rights and making plans for future independent provision will be important, particularly where one partner may have expected to rely on the accrued pension of another.

Furthermore, if clients have life protection cover in place in the form of a joint policy, it’s important to check the policy terms. Some include a 'Joint Life Separation Option', which means that the contract can be amended to cover both parties individually.

Many policies also contain options which allow clients to increase the amount of their cover following life events, including divorce or separation, without needing further underwriting.

It may be worth increasing this cover if clients have had to take on a new or larger mortgage or other debts.

Following a divorce or separation, a client’s existing will is unlikely to be appropriate to their new circumstances and will need reviewing.

The first step in this process is to consider what assets are theirs to pass down, and then to decide how they want these to be distributed – for example, they may have a new partner they want to include.  

Following these steps can help clients to make a clean financial break as well as a new, personal beginning.

Peter Hamilton is head of strategic partnerships at Zurich