Isla Leask: Finding and maintaining financial stability after divorce
Isla Leask discusses financial advice for individuals undergoing a divorce, emphasising the importance of financial planning, updating documents, managing debts, prioritising pensions, and seeking guidance to ensure financial stability and independence post-separation.
Agreeing to a divorce is one of the hardest decisions a person can make during their lifetime and can cause a lot of stress, not only emotionally, but it also takes its toll financially too. According to the Scottish Government, a total of 8,249 divorces were granted in Scotland in 2021/22, an increase of 45% from the year before. There are many reasons why a marriage could end in divorce and one of the challenges of each party is to ensure that they are financially secure during the proceedings and in their future, once the divorce is finalised. During this time, it is important to consider help from a financial adviser.
Starting over can be a daunting prospect, particularly if you have complicated financial matters to untangle. You and your estranged spouse will have to collate information regarding your finances and it can be a lengthy procedure to reach a final settlement which can be agreed by a judge. You can still, however, maintain fiscal independence in the years to come, provided that you protect your financial assets during the divorce process and make lucid and logical financial decisions afterwards.
Here are six key pieces of advice on how to get started when striking out on your own.
Give yourself some credit
Many couples these days own their own homes or have joint or individual debt on loans or credit cards, it’s important that, during the separation of assets and afterwards, repayments continue on these liabilities. If payments aren’t kept up to date a lender can start action to repossess your home or arrange debt management to recover their losses. Missing payments can harm your credit score and reduce your ability to borrow funds in the future. If you are struggling with debt, it is possible to receive free guidance from Citizens Advice Scotland.
It always best to have some emergency funds in place for any unexpected expenditures. A general rule is a sum equating to three months general expenditure as a minimum however if you are able to save more, even better. Any emergency fund should not be tied to a fixed period and should be always easily accessible. Any funds above this amount which are not required immediately can be held for a tied period or invested into an ISA in order to benefit from potential growth in order to try and meet if not exceed inflation.
It might seem obvious, but general administration can be easily forgotten or overlooked when life is overwhelming. Paperwork might be the last thing on your mind, but it’s important to make sure your information is up to date especially if things such as bills, debt, savings and investments are held in joint names with your estranged spouse. Different companies have different procedures, but they should have reasonable measures in place to help separating couples to manage joint accounts. In additional to your regular activities, it’s imperative your will, pension expression of wish, next of kin and power of attorney are all updated, as this would ensure your assets are passed on to who you wish to benefit or someone you trust can make decisions on your behalf if you were incapacitated to do so.
It is important to have protection in place to ensure that, if the worst happened to you or you were unable to work due to illness, there were finances in place to help cover the cost of daily expenses or to repay a mortgage, especially if there are children involved. Begin by reviewing any existing protection policies in place along with an provided by your employer. There are several types of protection plans available which can provide a lump sum on your untimely death or critical illness, or income protection which can provide you with a regular income if you were unable to work due to illness.
Prioritise your pension
It has been well documented that women’s pensions are much lower than men’s and this is because on average a woman is likely to earn less due to a lower employment rate, hours worked or career breaks to raise families. These differences have narrowed over the years and in the future pension incomes will reduce further as the gender gap gets smaller and men take larger roles within the family dynamic. It’s important that everyone saves towards their financial independence once they stop working. The state pension is likely to only cover a small portion of expenditure in the future, if at all, and with state pension age expected to increase in the future. Saving into a private pension can allow you to have more control of when you stop working, rather than waiting to receive government pension.
You may be entitled to a share of your estranged spouses’ pension benefits, and your solicitor or a financial adviser may be able to help you understand your entitlement.
Many employers offer workplace pension schemes that will allow you to make contributions and many also provide employer payments on your behalf. If you are self-employed, you can also set up personal pension schemes with providers offering lower charged plans these days compared to those offered in previous years.
If you are about to reach state pension age, you can apply for a pension forecast which can identify any gaps in your qualifying years. If applicable, you may be able to purchase additional years in order to benefit from a higher state pension, for a small cost.
If you have reached pensionable age, it’s imperative that you make sure you’re getting everything you’re entitled to, particularly as you may be able to benefit from your ex-partner’s National Insurance Contributions.
Reach for your Goals
Divorce might change your circumstances, but it won’t change many of your priorities, both for the present moment and the future. You will still need to plan for retirement, save for your children’s futures if you have a family, and in the short term, budget for rent or mortgage payments, bills, and other day-to-day necessities. Re-evaluating your finances in light of your current circumstances, and budgeting accordingly, will help give you peace of mind and prepare for whatever comes next.
Having a clear set of goals that you wish to achieve in the future and work towards, can help you create a path that remains achievable to you. Reviewing this regularly to check you are on track is important to your plan and goal success.
Turn to the Professionals
The ultimate way of mapping out your financial future is by engaging the services of a financial planner. As professionals with vast experience of supporting individuals through a range of scenarios, financial planners can offer bespoke advice tailored to your needs, and with your specific circumstances at the heart of their advice.
Getting divorced inevitably will bring huge changes to your life, but it’s also an opportunity to take stock of your finances, get your new priorities in alignment, and move forward with purpose, autonomy and resolve.