How a financial planner plays an essential role in divorce settlements

Getting divorced is a big life decision, and not one that you’re likely to undertake lightly. But for many people, the potential financial fallout from a divorce is stopping them from taking this step altogether.

According to Money Marketing, more than a third of Britons are putting off getting divorced due to worries about the cost, with 30% of respondents saying they feared being left in “financial ruin” after divorce.

Separating finances can undoubtedly be a complex process, and it can be difficult to grasp the full financial outcomes of a proposed settlement while you’re in the emotional throes of separation.

A financial planner can help you shape your divorce settlement right from the start, guiding your decision-making and helping you take more control over your financial future.

Your financial planner can help you understand the long-term implications of the proposed settlement

When you get divorced, you and your former spouse will usually need to reach a financial settlement before you can complete the process. This is the formal, legal agreement you make regarding how to divide your marital assets.

Depending on how long you’ve been together and what assets you have both as a couple and separately, this can be a difficult process. While your emotions are running high, it can be hard to effectively give much thought to the more transactional side of the divorce.

Your solicitor will deal with the legal aspects of your divorce, which include drawing up what they consider to be a fair financial settlement. However, adding in the guidance and support of a financial adviser means you can better understand exactly what the settlement means and how it could extend to your finances throughout the rest of your life.

4 ways a financial planner could help you with your financial settlement

1. Tax planning

There can be certain tax implications associated with your divorce settlement which a financial planner can help you understand, making sure you maximise the amount you receive and mitigate the amount of tax you pay.

Under usual circumstances, if your spouse transfers assets to you, they may be liable for Capital Gains Tax (CGT) if they’ve grown in value. However, under the terms of a divorce settlement, you and your former spouse can transfer assets on a “no gain, no loss” basis, which allows three years before CGT is triggered. If your transfers form part of your court-approved consent order, then there’s no time limit at all.

However, while there is no immediate tax due, the “inherited” tax trap could kick in if you’re the receiving partner and decide to sell the asset. When the asset is transferred to them, they effectively inherit it at its original cost. So, any growth is calculated from this point until the point of sale, which could then lead to a costly CGT bill.

A financial planner will look not just at the figures on a page, but at how they will translate once tax has been applied. If you are receiving assets from your former spouse, they can establish what the actual value of your settlement could be once tax liabilities are accounted for.

Read how HarperLees can help if you’re going through a divorce, and see what our clients have to say about our services

2. Cashflow modelling

Your solicitor will be looking at a fair division of assets in the here and now. But a financial planner will help you see how the proposed settlement could play out well into the future. Most will use cashflow planning, a sophisticated type of software, to analyse the figures using a range of different scenarios and variables.

For example, how long the money will last if you keep your current home or if you downsize, and how a change in your spending habits could make a difference. Cashflow modelling takes into account factors like inflation and your State Pension Age and entitlement to produce a realistic outcome that can assist your decision-making regarding accepting or rejecting a proposed settlement.

3. Pensions

These are often a much-overlooked part of a divorce settlement and when they are included it can be difficult to understand the figures. On paper, a pension could appear to be roughly the same value as a property. However, a pension income will be subject to Income Tax, which changes its “real” value.

Also, it can be incredibly difficult to effectively value a defined benefit (DB) pension, which provides an annual salary on payout. A financial adviser can dig deeper, analysing how the pension figures are likely to look in retirement, which may be very different from the figures on the page.

Your solicitor may suggest a Pension Sharing Order (PSO), which puts the agreed percentage into a new pension pot. Again, a financial adviser can support here, helping you to invest the new pension funds in line with your risk tolerance and retirement aspirations.

4. Savings and investments

These are also likely to form part of your divorce settlement, and it can feel disheartening to see wealth you’ve built together being carved up. A financial planner can help you to rebuild your savings and investments in line with your new status.

For example, ISAs can’t simply be transferred, so you’ll need to liquidate them to make a payment. This means you’re potentially losing out on the tax-free benefits ISAs can bring. You could open a new ISA, but as you’re confined to a £20,000 a year deposit across all ISA products, you may not be able to redeposit this all at once. It can also be very common for newly divorced people to feel “safer” with cash, and again, a financial planner can help you to find the right balance between emergency cash savings and appropriately invested assets.

Get in touch

We understand that going through a divorce can be a very difficult and emotional time. We’re here to help provide clarity and support, guiding you through your financial settlement and helping to give you more confidence about your post-divorce financial future.

If you’d like to talk to us, we’re always happy to help. Please email us at info@harperlees.co.uk or call 01277 350560 to find out more.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate tax planning.