Separating your finances if you split
January often sees a spike in divorces, with the stresses of the festive season sometimes proving the final straw, but if you are going your separate ways this New Year, there may be steps you can take to ease the pain financially, if not emotionally.
Working out who owns and is entitled to what can be really complicated, especially if you’ve been together for many years and hold savings and investments jointly, and you also have credit agreements together.
Here’s our rundown of some of the things you need to consider if you’re divorcing and want to safeguard your finances.
1)Protect your credit score
If you have any joint credit agreements with your ex, such as a joint credit card, mortgage or personal loan, your credit reports will be linked. This could potentially damage your credit score in future if they don’t manage their finances responsibly.
Kara Gammell, personal finance expert at MoneySuperMarket, said: "If your ex-spouse has missed payments, defaults or other negative information it could impact your credit report – even after you separate. To avoid this, make a note to remind yourself to submit a request to be financially disassociated from your former partner when any shared finances or credit agreements end. This will help protect your long-term financial future.”
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2) Separating your savings
How any savings you have are separated when you split up will be down to the types of accounts you have. For example, a cash individual savings account (ISA) can only be held in one name. That means if you wanted to give any of the money in your ISA to your former partner, you would have to withdraw the amount from your account, as you cannot transfer money between your ISA and theirs. Bear in mind that once you cash in an ISA, it loses its tax benefits, which are that returns are free of both income tax and Capital Gains Tax (CGT). If you have any savings in fixed rate accounts, you’ll normally have to wait until the account matures until you can divide the savings in it, as if you take it out early, you’ll usually lose some, if not all, of the interest earned.
3) Remember to factor in pensions
Many separating couples are so focused on immediate financial issues that they can sometimes forget about including pensions in any settlement, even though these can be life-changing. According to calculations by interactive investor, based on pension valued at £100,000 at age 40 and assuming retirement at 68 (the state pension age is rising to 68 for people born on or after 6 April 1978), a spouse could potentially forgo a financial asset worth over £196,000 if this pension is excluded from the divorce settlement. This example assumes annual growth of 5% over the 28-year period.
Myron Jobson, Senior Personal Finance Analyst at interactive investor, said: “Pensions are widely underestimated, and our research reveals that the majority of divorcing couples don’t even discuss them. This oversight leads many—particularly women—to miss out on future income that should have been theirs. A pension left invested over a long period of time is turbocharged by the power of compounding, where growth is not only on the original contributions but also on previous returns, significantly increasing the overall value of the pot overtime.”
4) Review any protection policies
If you have life insurance, the chances are your former spouse may be named as the beneficiary of your policy. Make sure you change this if you’re separating and no longer want them to receive any pay-out. It’s also worth reviewing how much cover you have, as if, for example, your split means you now face steeper childcare costs, you might need a higher level of cover in place.
5) Try mediation
The only people who are likely to benefit financially from a contentious split are divorce lawyers, so if it’s possible to find a way through amicably, you could save yourselves thousands of pounds. Given the significant costs usually involved in instructing solicitors, many couples prefer to use the typically cheaper option of mediation as an alternative. Mediators are impartial professionals, who aim to help both sides agree on how to divide up all the shared assets. You can find a mediator in your area using the National Family Mediation service’s Find Your Nearest Mediation Service tool.