For the second episode of my ‘Family Law Featuring’ podcast series, I recently caught up with Paul Miller, a Chartered Financial Planner to discuss the ways in which our respective areas overlap and feed into one another.
The podcast is available to be listened to here. But if you don’t have the time to listen, don’t worry: I have set out my top 6 takeaways below which will make interesting reading not only for those facing separation but perhaps even for those who are married or thinking about getting married. If you want more of the technical detail discussed, however, there is no substitute for listening to the episode in full.
1. There are many differences between the rights of those who are married and those of cohabiting, unmarried couples. In law, particularly on separation, these differences can mean entirely different financial outcomes and as I mention in the podcast, the area of cohabitees’ rights on separation is currently a hot topic, with the push for reform picking up momentum. But Paul shed some light on some of the differences from a financial point of view. Concisely put… tax! There are certain tax advantages which apply to married couples which do not currently apply to cohabiting couples, relating to income tax, capital gains tax and stamp duty. The most significant tax benefit for most married couples will be surrounding inheritance tax provisions.
2. Budget, budget, budget! There is never a time when having a full grasp on your spending won’t be useful. And it can be a comfort to know exactly where you stand – and even empowering. In the family law context, this will be a key consideration:
- When a relationship takes that next stage and you move in together, it is important to think about how expenditure will be met and in what proportions. Joint account or no joint account?
- If facing a separation, when two households will suddenly need to be created out of one, it is important to understand what your outgoings are and where there is room to tighten your belt. It will be relevant to your borrowing capacity (see episode one!) and to discussions around any financial negotiations.
- For those considering taking that next step, consideration should be given to whether to enter into a Cohabitation Agreement or Pre-Nuptial Agreement to ensure that intentions are clearly recorded.
3. There is a significant interplay between decisions which are taken from a financial planning perspective and the knock-on effect of this if there is a relationship breakdown later. For example, Paul talked about how assets may be transferred between couples as a tax planning measure, e.g. an investment property transferred to ensure the income received from it is received by the lower earning party. In family law, this could have significant consequences on a relationship breakdown. For example, for cohabitees this could mean the transferring party gives up their beneficial interest in the property and cannot secure a transfer back later. For married couples, it might put a property which would otherwise be considered as ‘non-matrimonial’ into consideration as a ‘matrimonial’ asset. It’s important to look at financial decisions from both the tax and legal perspectives.
4. Pensions will be a consideration in a divorce and that means being able to give full details of the pension(s) you have. Paul’s top tips are:
- Keep a record of your employment history/any pensions attached to those employments. If you have had a number of different jobs, it may be that you can lose track of some of your pension funds – and they may be worth a lot more than you remember.
- Remember that workplace pensions are now ‘opt out’ – which means you may have been opted in and never really thought about it – so you may have pensions you don’t remember.
- Pensions can be traced through the Gov.uk pension tracing service.
5. Something which often arises in the context of a divorce where there are various assets, is ‘offsetting’. That is the practice of one party taking more assets of a certain kind and trading them off against others of another kind. The common scenario is trading equity in the family home for additional pension funds. This can lead to one party who is property rich and one who is pension rich. While parties may think they are happy with this, it is important to consider the full picture. If you give up pension now, will you be able to rebuild it before retirement? If you give up your equity in the property now, will you be able to re-house or will you need to rent? From a family law perspective, a really important consideration is getting the correct calculation undertaken to make sure that the value of the pension being used is suitable for offsetting purposes; without this, there is a significant risk of the offsetting agreement reached being unfair and prejudicial to one party.
6. Sometimes in the context of a divorce, there will be considerations of taking a pension lump sum earlier than the normal retirement date in order to provide more short-term capital. This may be an option from age 55 (or 57 in 2028) but careful consideration must be given to this because the wrong decision now may be very costly later. The precise implications will depend upon the terms of the relevant pension scheme and advice from a Financial Advisor should be sought before any action is taken.
Paul Miller trading as Paul Miller Financial Planning is an Appointed Representative of In Partnership the trading name of The On-Line Partnership Limited which is authorised and regulated by the Financial Conduct Authority.
Tax planning, inheritance tax planning, will writing and auto enrolment are not regulated by the Financial Conduct Authority.
A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
The value of units can fall as well as rise, and you may not get back all of your original investment.
The tax treatment is dependent on individual circumstances and may be subject to change in future.
