A divorce is an emotionally challenging time for your clients, and it often brings about a significant change to their lifestyle. There are also some unique financial challenges they could face when separating from a spouse or civil partner.
While they might consider how they want to divide their assets in the short term, it’s easy for clients to underestimate how a divorce could affect their long-term financial plans.
Read on to learn about three significant financial issues that your clients may overlook during a divorce.
1. A potential loss in earnings
The transition from managing their finances with a partner to handling their wealth alone can be challenging for clients. This is especially true if a person was reliant on their partner’s earnings to some extent. This is why many clients, particularly women, may see their income fall after a divorce.
Indeed, according to Legal & General, women see their household income fall by an average of 41% in the first year after a divorce. In comparison, men see theirs drop by 21%.
Additionally, your clients may need to cover the full cost of expenses they previously split with a spouse or civil partner. This includes utility bills, rent or mortgage payments, and Council Tax.
As a result, it could be much more difficult for clients to manage their general living expenses after a divorce. They might have less income to contribute to savings and investments for the future too, meaning a divorce could affect their ability to work towards long-term goals.
Your clients may be unprepared for this. Fortunately, we can review their financial plan and help them create a new budget so they’re able to meet short-term obligations.
They may have different goals and priorities now that they’re divorced too. We’ll discuss these new aims with them and explore ways that they can save and invest for the future.
Ultimately, this means they could begin this new phase of their life in a strong financial position and may be more likely to achieve their long-term goals.
2. Splitting pensions
During a divorce, the proceedings often focus largely on how to split assets between the two parties. Their home is likely the most valuable asset your clients must consider, but they may be overlooking another important one – their pensions.
According to Legal & General, 58% of couples consider the value of their family home when divorcing while only 20% consider their pensions. Additionally, 29% of individuals actively waived their right to their ex-partner’s pension during the divorce settlement.
If couples don’t split their pensions equally, one person could be at a significant disadvantage when saving for retirement, especially if they were the lower earner. This is because their pension may be much smaller than their ex-partner’s.
It could be difficult for clients to make up a shortfall in their retirement savings if they find themselves in this situation. That’s why it’s crucial that they include all pensions in the divorce settlement.
After the divorce is finalised, we can help clients review their retirement pot and, if necessary, adjust their pension contributions. This means they could be more likely to achieve their dream lifestyle in retirement.
3. Updating protection
Protection such as life insurance, critical illness cover, and income protection may offer a valuable safety net in difficult circumstances. For example, if a client passes away unexpectedly, a life insurance payout could support their surviving family members.
Additionally, if they’re unable to work for a period because of an injury or illness, income protection could provide a regular payment to help them cover their general living expenses. Clients could also use income protection payments to contribute to savings and investments for the future.
During a divorce, it’s important that your clients review their protection for several reasons. For instance, if they have a joint life insurance policy with their ex-partner, they may need to cancel this and take out a new individual policy for themselves.
Additionally, the beneficiary named on a life insurance policy doesn’t typically change upon divorce. So, if your client named their spouse or civil partner and they don’t update the policy during the divorce, their ex-partner could receive a payout in the event of their death.
Your client’s protection needs may also change after a divorce if they move into a new home and their income changes. As such, it’s important that they review their cover and ensure it is suitable for their new situation.
If your clients overlook these financial aspects of divorce, they may find it more difficult to achieve their desired lifestyle now and in the future. Yet, with our support, they can remain financially stable and continue working towards their long-term goals.
Get in touch
If you are handling a divorce for your clients, we can support them with their finances.
They can contact us at hello@ardentuk.com or call or WhatsApp us on 01904 655 330. As an award-winning financial advice company with advisers included in the 2024 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
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. Past performance is not a reliable indicator of future performance.
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.
Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.
