The best laid plans - managing finances during a relationship break-up
Ross Leckridge, Chartered Financial Planner with Aberdein Considine’s wealth management operation in Edinburgh, says that in the event of separation from a partner or spouse, it’s almost inevitable that whatever financial plans were in place before will need to be torn up and re-drawn.
“Commonly held financial objectives, from big things like retirement to small things like replacing the car, might be scrapped or changed significantly, “ Leckridge explains. “The best place to start again is back at the drawing board by considering new financial needs and objectives. You need to create a new blueprint for what you want life to look like, so you can set about building that life.”
What’s ‘your number’?
Leckridge says a large part of any separation agreement is the financials. “Many often under or overestimate how much money they need because they’re making decisions on a whim,” he explains. “One of the greatest benefits of creating a new financial plan during the separation process is that it helps you find ‘your number’ - the figure needed to allow you to move forward with your new life. Then, negotiations can become a lot clearer.”
Process of elimination
Leckridge says: “Let’s imagine you need to plan a long and reasonably complicated trip somewhere. Do you look into one route and one accommodation option, book everything and move on? Or do you consider all the travel options and weigh up the advantages and disadvantages? There’s no reason financial planning after separation should be any different. A good financial plan will be borne out of creating and considering multiple scenarios to see what works best.”
Divide…and conquer?
The division of assets can often become something of a battleground in a separation, according to Leckridge. It is therefore essential that people properly understand what’s at stake and that means understanding the nature of the financial assets in play.
“Cash in a bank account is about as simple as it gets, but what about pensions, ISAs, shares or investment funds? If you can’t clearly articulate how all the assets involved work, how they’re taxed and how accessible or risky they are, it means you probably don’t understand them yourself. If you don’t understand them, it’s impossible to judge their value,” adds Leckridge.
Pensions
“Back in the March 2004 Budget, Gordon Brown attempted to bring about pension simplification. Twenty years and several iterations later, pensions continue to be some of the most complex personal finance instruments,” says Leckridge.
He explains that when it comes to trying to carve up pensions in an equitable manner, individuals should consider all options available to solve the pensions conundrum. But, as with everything else, that begins with first understanding what’s in the mix and then knowing how to attribute value accordingly.
The legal perspective
The division of matrimonial property belonging to a married couple on separation or divorce is regulated by the Family Law (Scotland) Act 1985. Matrimonial property is all the property belonging to the parties or either of them at the date they separated - the 'relevant date'. It includes all assets (and debts) acquired during their marriage, except those received by way of gift or inheritance from a third party. It will also, under special provision, include a house acquired before the marriage for use by them as a shared or family home. Pension interests are very often some of the most valuable assets that form part of the matrimonial property and there has been specific provision in the 1985 Act for pensions to be shared since 2000.
Leonie Burke, partner in the Edinburgh family law team at Aberdein Considine says: “Notwithstanding, we do still come across cases where a separating couple will propose to agree not to include pensions in the pot of matrimonial property which is to be divided between them.
“The reasons for this are not always clear but it may be because pensions don’t have immediate liquidity as most pension funds can’t be accessed until the member is at least 55 years old. Therefore, the value of a pension claim seems less important to them, particularly amongst younger couples.”
“But agreeing to disregard your spouse’s pension from the matrimonial property pot would be contrary to legal advice.”
“A pension is a tax efficient savings plan which will provide you with an income on retirement and its value cannot be understated.”
One reason why pension sharing on divorce was introduced was because it was recognised that one spouse may accrue more in his or her pension fund than the other spouse during the marriage, explains Burke. She adds that by sharing the value of both spouses’ pensions on separation or divorce, one spouse is not disadvantaged by taking a career break, or moving to part time working, to raise children.
“Post separation, your change in circumstances may mean that you have less disposable income available to you to pay into a pension. Therefore, if you are entitled to a share of your spouse’s pension, this should be given serious consideration,” says Burke. “If pensions are included in the matrimonial property pot, pension sharing is an option in most cases. Although there are a number of legal principles and practical considerations which apply to pension sharing, as well as strict legislative timescales to be met, with proper advice, pension sharing is usually a very straightforward process”
To conclude, legal and financial experts say it is essential to seek both independent legal and financial advice at the earliest opportunity. Information about the available options on separation can provide comfort at a worrying time, even if someone decides not to take action immediately.