It can be difficult to have cool-headed conversations about your finances when you’re getting divorced. But if you spend time now talking through the financial implications of your separation and making sure everything is in order, it should mean fewer problems further down the line.
Freezing a joint account
If you have a joint account, when you split up you can contact the bank to cancel the joint account mandate so that the account is frozen and neither of you can withdraw the money. This makes sense as even when the split is ‘amicable’ relations can deteriorate quickly under stress and when discussing finances.
The account will only be reopened once you have reached a financial agreement.
Dealing with your property
If you are married, you will both have equal right to your home, no matter whose name is on the mortgage. This means that when you get a divorce, your property is likely to be the most important asset that you need to divide. Usually this means selling the property and splitting the proceeds, but you may agree that one of you will continue living in the property for the time being, usually because you want your children to be able to stay in their home.
In the longer term, you will need to consider whether the money you can raise from selling the property will be enough for each of you to buy your new home, or whether renting will be the best option. Alternatively, if you are thinking about keeping the property, can you afford to meet the mortgage payments when you are on your own?
ACTION:
1) Get an up-to-date valuation of the property;
2) Speak to your mortgage provider to confirm the sum still owing on the mortgage, and any penalties that will apply if you pay it off early.
3) If you are thinking of keeping the property, ask about the process for changing the agreement.
Paying off debt
If you have a joint loan, credit cards or a joint account with an overdraft, it is vital that you understand that you are both liable for the whole of the outstanding debt.
That means that if one of you cannot pay your part, the lender can pursue the other for 100% of the debt. It’s therefore really important that when you split up you have a conversation about the ongoing repayments and how this will be dealt with.
Extra care around credit ratings… having joint finance and debt may mean that your credit ratings are linked, so that any blemishes on your ex-partner’s credit record may impact your ability to get credit. You can establish this by requesting a credit report and if there are financial links between you and your ex-partner, ask for them to be removed through a process called ‘financial disassociation.’
ACTION:
1) Know what debt you have and what you will personally be liable to
2) Don’t get tarred with a poor credit rating from your ex
Pension
Your pensions are an important part of the calculation when your assets are being divided. There are several options for splitting your pension assets. You can get a court order for the pension to be divided between you at the point of divorce (a sharing order), so you can then each continue building up your own, separate pension pots. Or, you can get a pensions attachment order, so that when your partner starts taking their pension, you’re entitled to some of the benefits (or vice versa).
Alternatively, you can consider an ‘offset’ of the value of the pension, so the money in the pension can be taken into account in the overall calculation to divide up your assets. For example, it may be agreed that you get more money from the sale of your house but your partner keeps all of their pension savings.
However, think carefully about this action and about whether you are likely to have enough money when you reach retirement. Remember that there are some important benefits to having a pension, so think carefully before you offset a pension against other assets.
ACTION:
1) These choices will be impossible unless you know the latest values of the pensions and other assets. Get up to date statements and valuations ordered asap, as these can take some time to collate.
2) Unless you know how much you NEED you will be acting in the dark. Only a lifetime cashflow projection – working out how much you need to live a secure and happy life – will help you understand this. The good news is Magenta can assist you with this.
Ongoing living costs
You will need to think carefully about your new budget. Your financial future will be altered by your break up and you may find that money is tighter when you are no longer with your partner. Think through what your new situation will mean for your income and outgoings, and whether you’ll need to make any changes. Again, putting together a cashflow forecast will help with this and ensure that you know what your budget will need to look like.
Remember that if you are now living on your own, you can apply for a single person discount on your council tax, which means your council tax bill is reduced by 25%. You may also be eligible for tax credits or other benefits, which you can check here: benefit calculator
Maintenance payments – In the case of divorce, the court can order that the financially stronger partner pays spousal maintenance payments to their ex-partner to help with their living costs.
ACTION:
1) Spend time thinking about your budget and resources and how these will look once you are on your own. Be realistic and list the necessities but also the things that you need for your family to be happy and for things to remain as ‘normal’ as possible, like a holiday budget, children’s out of school activities and presents.
2) Know about benefits you can claim now you are single
Magenta’s splitting up finance checklist:
If you are concerned about your partner withdrawing money from your joint account, ask your bank to freeze it
Check your credit rating and ask to be financially disassociated from your ex
Make a list of your joint and individual assets and liabilities
If you own property, get it valued
Contact your mortgage, loan and pension providers for balance statements
Remember to take your pension into account when you are considering assets and get financial planning advice regarding your options
Make a new budget with revised income and outgoings and understand HOW MUCH YOU NEED for the rest of your life – by forecasting this.
When you are going through the process of splitting up and facing divorce it can be very easy to make rush decisions and jump into a financial agreement that may not be the best for you in the long term.
Magenta can help you make sense of the huge decisions you will be facing at this time, so give us a call for a confidential chat and see how we can help.