In many cases, divorce has more impact on a person’s current and future financial well-being than any other event in their life. Sound financial planning may be the last thing on your mind, but it is critical to give it some thought.
“Divorce happens in an emotionally charged environment, and you have a relatively short period to make financial decisions will affect you for the rest of your life,” says James Brien, author and founder of Easy Online Divorce.
The first thing to recognise is that for everyone but the very wealthy, divorce will hurt your standard of living. Two households cost more to maintain than one, and if one person in the marriage has been a stay-at-home parent, there is less money to pay for it all.
Secondly, you should get some advice unless your marriage was short-lived and is ending amicably, and you have no children and marital assets.
Four key issues to consider in a divorce settlement
Agreed versus contested divorce settlement
A divorce settlement reached by agreement has significant advantages over a contested settlement dragged in the court. It costs less and is quicker than disputed settlements.
More importantly, it can save you from the damage of the emotional emotions that comes with disputes in divorce court.
Of course, an amicable split is easier said than done and requires a lot of hard work. There can be conflict around what a divorce settlement should look like as conflicts from the marriage spill over into the divorce.
A disputed financial divorce settlement will cost spouses somewhere in the region of £15,000 to £25,000 each in legal costs. “People often make mistakes in the divorce process that causes them long-lasting financial damage”, says Brien. “With so much at stake, we urge our clients towards a collaborative approach, whether between themselves or via mediation.”
Work out your budget
It’s crucial to work out your living expenses to determine what level of divorce settlement you can afford to live with. Budgeting is particularly important for parents who will be the primary caregiver for the children.
Rent and mortgage payments, council tax, utility bills, and groceries are all basic requirements. But be sure to factor in other costs such as transportation to work and school, clothing and childcare.
While it’s easy to become overwhelmed when focusing on the perceived or actual enormity of the change in the short term, don’t lose sight of your long-term needs too. Do you have adequate pension provisions in place? There is often an imbalance in pension provision between separating couples that needs to be addressed through a pension sharing order.
Be aware of taxes
Divorce settlements can have significant tax implications. Understanding how and when assets are taxed is crucial when dividing up assets. The home is often the largest capital asset, and any transfer of it could potentially give rise to Capital Gains Tax.
Understanding how this works and how liability may be avoided is essential to hold on to your wealth.
Create your new life 2.0
Divorce is one of the greatest transitions we make in life. As with all change, the perception you have of it and the actions you take as a result will determine whether divorce becomes an agent of positive or a negative change.
There is no question that your standard of living will dip in the short term in most cases. If you’ve been out of the workplace for a long time, thinking about returning to it can be daunting, but thankfully there is plenty of training and help on hand.
“A lot of stay-at-home parents find it a bitter pill when being told they should go back to work, but most of the time, they eventually should,” said Brien. “Often a person’s most important asset is their earning capacity as this helps them build, rather than eat into their retirement fund.”
Why is thinking about your financial divorce settlement important?
Decisions made during the divorce process can have a massive, long-lasting impact on your financial well-being, so it’s prudent to take the time and consider your options. If you have any questions about the topic raised in this article, send us an email, or if you would prefer to talk in person, you can schedule a free consultation here.