Independent Financial Advisors - IFA Southampton, UK

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Financial Implications on Divorce

In financial terms, there are a number of stages in a divorce: disclosure, negotiation (and hopefully reaching an agreement) or order, the implementation of that agreement or order and then looking to rebuild financially.

Disclosure and negotiation

Both parties to the divorce or separation proceedings are both required to give full and frank financial disclosure. A financial planner can obviously help with this, for example

• By providing an independent and professional statement of your finances
• By advising on the best way to divide your assets
• By calculating the CGT and other tax implications of the sale or transfer of your assets, to ensure that one party is not left with a large tax liability after the agreement or order has been approved by the court

Agreement/order

Following a negotiated agreement or the decision of the Court, a spouse is likely to end up on the paying or receiving end of one of the following orders:-

• Lump sum or property transfer
• Maintenance (capitalised maintenance)
• Pension Sharing

Lump sum

Specialist advice should be sought as to the best and most tax efficient method to raise a lump sum or otherwise transfer matrimonial assets. This exercise should be completed at the earliest stage of negotiations to help the courts to understand the tax and cost implications of raising finance.

The spouse receiving the lump sum should take advice as to how it should be invested, either for capital growth or to provide income at a required level if there is a capitalised maintenance order, see below.

Maintenance

Maintenance is usually paid from the payer’s monthly income, but consideration should be given to achieving the most tax efficient method of payment.

A capitalised maintenance order can be relevant in order to secure a clean break even when there is an element of maintenance required. A calculation is made, sometimes referred to as a Duxbury sum, which is intended to identify the lump sum needed in order to provide the wife (usually) with an annuity of an agreed or ordered sum for the rest of her life. There is an element of discount to allow for capital growth and additionally by way of compromise, since it is often the wife seeking the capital sum rather than annual maintenance. A financial planner can assist in the calculation of the capital sum required, and a specialist matrimonial lawyer will advise on the pros and cons of an ongoing maintenance order versus capitalised maintenance, for example the likelihood of remarriage which would bring an end to an ongoing maintenance order.

Pension sharing orders

Since 1 December 2000 the Welfare Reform and Pensions Act 1999 (WRPA 99) has allowed a couple on divorce or nullity of marriage, the option of pension sharing and the court can grant a pension sharing order against the members pension rights in a pension arrangement. A pension sharing order will allow the couple on divorce a clean break, unlike an earmarking order against retirement benefits that will be activated at the retirement age of the scheme member.

The pension sharing order must be issued after the decree nisi but will only be implemented after the decree absolute in the case of divorce or decree of nullity as specified in section 24B of the Matrimonial Causes Act 1973 (MCA 73). The pension sharing order will create a pension debit against the retirement benefits of the scheme member and the former spouse will receive a pension credit of the same value.

This pension credit can be used as an internal transfer to the existing scheme if this is permitted such is the case with an unfunded public service scheme, and this will create a separate pension arrangement in the name of the former spouse. Alternatively an external transfer will allow the pension credit to be moved to a separate pension arrangement as chosen by the former spouse.

Pension Sharing Procedures

The procedures for pension sharing are specified by subordinate legislation through regulations and are similar to those of earmarking. When the court makes a pension sharing order it must send to the member with the pension rights within 7 days of granting the order or 7 days after the decree nisi in divorce or decree of nullity. On receiving notification of a pension sharing order the member of the pension arrangement must within 7 days request the initial valuation and information from the pension provider.

The provider must furnish within 21 days to the court or scheme member information on the pension arrangement and if they fail to provide the information they could be fined by The Pension Regulator for the breach of the requirements. The provider will have six weeks to make the valuation of the member’s pension rights or accrued retirement benefits. The valuation requested will be the cash equivalent transfer value (CETV) and in England and Wales this will also include retirement benefits accrued prior to the marriage.

Once the court has determined the percentage allocation to a pension credit to the former spouse the provider of the pension arrangement will have four months to action either an internal transfer, which for example is the only option for an unfunded public service scheme, or if this option is not permitted to make an external transfer.

Pensions are complex as each scheme is unique and runs to its own rules, and specialist advice should always be sought as to the merits of seeking a pension sharing order, the true value of the pension, the rules of the scheme and the best company with which to place the newly acquired pension share.

A husband who has lost what is likely to be a significant proportion of his pension will need to consider how to rebuild, by maximising his contributions, and again specialist advice should be sought.

Pre Marriage Planning

As a final note, it is always worth considering a pre-nuptial agreement. They are not yet enforceable in the English Courts, but their existence is always a factor which is taken into account, and they can be given significant weight as a legal contract between two consenting adults if several fundamental checks have been applied. Briefly, they are that before signing each party must exchange full and frank financial disclosure, each party must have had the benefit of independent legal advice, there must be sufficient time for consideration and cooling off in advance of the proposed wedding and thought should be given to the financial effect of the arrival of children if appropriate; a pre-nuptial agreement signed even perhaps in the month of the wedding is unlikely to be considered sound. The pre-nuptial agreement must make adequate provision for both parties and for any children, and there should be review periods built into the agreement to ensure that it remains relevant and capable of being relied upon.
 
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