How to financially plan for divorce before it happens

Divorce is not only an emotional challenge but also a financial one, and the process of disentangling finances can be complex. Careful planning before beginning proceedings can make a significant difference in protecting your long-term financial security.

This guide takes a comprehensive look on how to financially plan for divorce before it happens, focusing on assets, debts, ownership, potential pitfalls, and planning for post-divorce life.

Understanding the financial landscape of divorce

Divorce proceedings often involve a financial settlement, known as “ancillary relief.” Courts have wide discretion under the Matrimonial Causes Act 1973 to divide matrimonial assets fairly, though not necessarily equally, depending on factors such as needs, income, standard of living, and the welfare of any children. Because of this flexibility, it is essential to prepare thoroughly.

Assets to consider before divorce

Many spouses underestimate or overlook the full extent of the assets that may be considered in a divorce. A detailed list should be prepared before proceedings and include:

• Family home: The matrimonial home is usually the most significant shared asset. Regardless of legal ownership, courts consider it a matrimonial asset if it was used as the family residence.
• Pensions: Often overlooked, pensions can be one of the largest assets in a marriage. Pension sharing, earmarking, or offsetting can form part of a settlement.
• Savings and investments: ISAs, stocks, bonds, and other investment accounts are included.
• Business interests: Company shares or directorships may be considered matrimonial property, even if only one spouse is involved.
• Vehicles and valuables: Cars, jewellery, antiques, art collections, and other valuables can hold significant value.
• Life insurance and endowments: Policies with cash-in values may be divided or reassigned.
• Overseas assets: Property, investments, or bank accounts outside the UK will be subject to disclosure and division.
• Intellectual property and royalties: Income-generating assets such as patents, copyrights, or book royalties should not be overlooked.

Just as assets are divided, debts accrued during the marriage must also be considered.

• Joint debts: Mortgages, credit cards, and loans taken out jointly are the responsibility of both spouses. Even if one spouse agrees to take over payments, creditors can still pursue both parties.
• Individual debts: Debts in one spouse’s name may still be scrutinised if they were used for family benefit.
• Secured vs unsecured debts: A mortgage (secured debt) carries different risks than unsecured debts like credit cards.

Checking ownership and documentation

Ownership of assets and liabilities should be verified well in advance of any divorce proceedings being started. Check whether the family home and other properties are held as joint tenants or tenants in common. If you are not registered on the title deeds, you may have to register your Matrimonial Home Rights to protect your position. This can be done simply and quickly by completing Form HR1 and sending it with proof of ID/address/marriage to the Land Registry.

Note which accounts are joint and which are individual. Consider the risk of funds being withdrawn without notice. You can ask the bank to freeze a joint account; however this also prevents you from accessing the funds too. You should also bear in mind that any direct debits you have will also be affected and will not be paid whilst the account is frozen. Here, alternative methods of paying need to be employed.

Regarding pensions, obtain a Cash Equivalent Transfer Value (CETV) for all pension schemes as soon as possible. This will need to be disclosed during the divorce process, and it can take a long time for these to come through. If the divorce happens some months after obtaining your CETV, you will probably have to obtain an updated valuation, but at least it allows you to provide a fairly accurate estimate.

Divorce can affect inheritance rights. If you are going through a divorce and your spouse is named as your main beneficiary, they will inherit your estate should you die before the final divorce order is made. To prevent this, you should make a new will excluding your soon-to-be-ex from inheriting your estate.

If you have a business, it is helpful to gather its Articles of association, shareholder agreements, and partnership agreements as this may affect how business assets are treated.

Things to do as a minimum before divorce proceedings begin include:

• Gathering financial documents: Bank statements, tax returns, payslips, mortgage documents, pension statements, and investment records.
• Get professional valuations: Property, businesses, pensions, and valuables may need expert valuations.
• Consult a financial adviser: Especially one experienced in divorce planning.
• Check your credit report: To identify joint accounts and assess your creditworthiness.
• Build an emergency fund: Divorce proceedings can take months or years; having a financial cushion helps.
• Consider mediation: Resolving financial issues through mediation may be less costly than litigation.

Common pitfalls to investigate before divorce

There are several financial pitfalls that spouses often overlook when preparing for divorce:

• Hidden or undisclosed assets: Ensure you conduct a thorough financial disclosure. Failure to declare assets can result in future claims even after settlement.
• Underestimating pensions: Many underestimate the value of pensions. In long marriages, these can be as valuable as the family home.
• Tax implications: Transfers of assets during divorce can have tax consequences. For example, Capital Gains Tax (CGT) may apply if transfers occur outside the tax year of separation.
• Business valuations: A business must often be valued professionally, not simply taken at book value.
• Overlooking debts: Assuming debts will simply follow the person who took them out can be a costly mistake.
• Impact on credit rating: Joint financial products link credit records. If one spouse defaults, it can affect the other.
• Future financial claims: Without a legally binding “clean break order,” a spouse can make financial claims years later.

Planning for post-divorce life

One of the biggest mistakes is making emotional decisions about assets, particularly the family home. While it may feel important to hold on to the property for sentimental reasons, it may not always be financially sustainable. Ensuring decisions are based on realistic financial projections is critical.

One of the most crucial aspects of financial planning is preparing for life after divorce, and asking yourself the following questions is a good place to start:

Income considerations:

• Will you need to re-enter the workforce or increase your hours?
• Are you entitled to spousal maintenance or child maintenance?
• What will your expected living expenses be once separated?

Housing:

• Will you remain in the family home, buy out your spouse’s share, or move into rented accommodation?
• Can you afford a mortgage on your own, or will renting be more realistic?
• Will you need to downsize to a smaller property?

Budgeting:

After answering the above questions, it will help to formulate your plan for the future post-divorce by:

• Creating a realistic post-divorce budget that includes rent/mortgage, bills, food, childcare, insurance, travel, and discretionary spending.
• Factoring in legal costs and moving expenses.

Savings and retirement:

Depending on your age and circumstances, you may need to consider the following:

• How will divorce affect your pension provision?
• Do you need to start or increase retirement savings?

Children:

• Child maintenance payments must be factored in.
• Additional costs like school fees, extracurricular activities, and university savings should be discussed.

Financial planning before divorce is about more than just dividing assets—it is about securing stability for your future. By identifying all assets and debts, checking ownership, anticipating pitfalls, and carefully planning for post-divorce life, you can approach the process with clarity and confidence. Being organised and proactive provides the best chance of protecting your interests.