How to financially plan for the costs of divorce and rebuilding again: Sarah Coles

You’re going through the emotional wringer, at the same time as you’re trying to make sensible decisions about your future and your finances. It’s easy for one to derail the other, but there are some things that can help keep you on track.

If you’re in the early stages of a split, your first priority is damage limitation.

Divorces are expensive, with horrible legal bills hitting at the same time as you’re wrestling with the challenge of living on a single income.

If you’re going to get through this in one piece financially, it makes sense to draw up an emergency budget to cut your costs.

You also need to consider your mortgage.

If you’re both named on it, you’re both liable for the full amount, so you need to work out how to avoid this damaging your finances while you’re going through the divorce.

You and your ex may be able to keep payments going until the divorce is finalised.

Alternatively, you can speak to your lender and see if they will allow you to pay interest-only for a period, or take a break while you sort something out.

Joint accounts will need action too. Ideally you will both agree to close the account and split deposits or debts between you.

If you can’t come to an agreement on this (or you’re worried you won’t be able to) you can tell the bank about the split, and they can place controls on debts and set the account up so that both of you need to agree to any money being withdrawn.

This isn’t a long-term solution, and you’ll need to work out how you’ll pay the bills while it’s frozen, but it will protect you while you sort things out.

Check your credit cards too. There’s no such thing as a joint credit card. If you both have a card on the same account, one of you will be the primary card holder, who is liable for spending on both cards.

If this is you, you can block both cards. If your ex is using the card for everyday expenses, they need to know as soon as you’ve done it.

Once you’ve limited the damage, you can turn your attention to the divorce – and the division of assets.

The first step is to understand the value of everything you own.

You may want to speak to a financial adviser about this, especially if there are defined benefit pensions and you want to understand what they’re worth – which in many cases is far more than the transfer value.

Once you know where you stand, you need to divide your assets. It can be incredibly difficult to agree this with your ex.

However, it’s worth trying to agree what you can between the two of you, because once lawyers get involved, you’ll typically pay over £200 an hour for their help.

The proviso is that if your ex tries to throw their weight around, it can do more harm than good. Rather than being bullied into a bad deal, your lawyer can take them on

Dividing the pension is worth particular attention, and you have a few options. The first is pension sharing, which divides it into two separate pensions.

On the plus side, it’s a clean break which leaves you both with a pension.

However, it’s relatively complicated and requires a pension sharing order from the court, which can mean you need legal and financial advice – both of which are pricey.

The second is pension offsetting, which will mean one of you keeps the pension, and the other takes other assets of the same value – often the house.

It can mean one of you gets to stay in the family home, and it offers a clean break. However, whoever trades away their right to a pension will have a mountain to climb when it comes to building a decent income for retirement.

A pension attachment order, meanwhile, means the person holding the pension pays an income or lump sum to the other member of the couple when they start taking their pension.

On the plus side you both end up with a pension income, and it’s not as complex as pension sharing. However, it can still be expensive, because you need a court order, and the tax will all be paid by the person taking the pension – so you’ll often pay more tax on it. And because it’s not a clean break, the person waiting to share their ex’s pension faces some risks. Their ex can delay taking it, and make them wait, and then when they die, the pension payments will stop. It means anyone taking this approach needs to appreciate all the drawbacks.

Once you’ve made it through the split, you have the tricky job of rebuilding. If you’ve run up debts or spent your savings during the divorce, paying them off and building three to six months’ worth of essential spending in an easy access account are the priorities.

You also need to think about your new protection needs, including wills: divorce, nullifies your will, so you need to make a new one as quickly as possible. You may need to rebuild your pension too, and rethink your plans for retirement, so the sooner you start, the better.

The whole process is daunting. This is just a whistle stop tour though the steps you need to take, and each one can turn into an epic battle.

However, by facing up to the challenges and getting stuck in, you can limit the damage, end up with a settlement that works for you, and then walk away from an unhappy marriage in a position to start afresh. Nobody will tell you that the divorce is easy – but an awful lot of them will tell you it’s well worth every ounce of effort required.

Retirement worries

A survey by HL has discovered that only a fifth of people expect to be able to travel overseas in retirement, a quarter think they’ll have the money to help their family out, and less than a third think they’ll be able to retire without worrying about money.

Alarmingly, only 61 per cent said they thought paying the bills in retirement was a realistic prospect.

If we’re going to be able to get by, there may be tough decisions to make around when we can afford to stop work, and the lifestyle we can manage. However, there’s also the chance to build our pensions in the interim.

Things are undoubtedly tough right now but if you can boost contributions when you receive pay rises or move jobs, it can make an enormous difference.

Sarah Coles is Head of Personal Finance for Hargreaves Lansdown and Podcast Host for Switch Your Money On