Financial planning in divorce


Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Divorce settlement

We explain the options available when splitting your assets

Divorce is a highly stressful time when emotional pressures are compounded by difficult financial decisions that can have implications for many years to come. We’ve spoken to the experts to find out what you need to consider when dividing up your home, pensions and investments.

The family home

Your house is likely to be your most significant asset and deciding what to do with it can be challenging. Couples who want a fresh start often choose to sell the home, split the proceeds and use this money to buy new properties.

James Corcoran, a financial planner at 1825, Standard Life’s financial planning arm, says issues can arise if the proceeds aren’t sufficient for both parties to buy properties that meet their needs. This is particularly a problem if either party is unable to secure a mortgage such as when there is a spouse that doesn’t work and/or they can’t afford to pay separate housing bills.

‘This has become more of an issue in recent years post the financial crash as mortgage lending criteria has severely tightened,’ says Corcoran.

Another option is for one party to retain the family home – particularly if children live there – while the other takes a bigger proportion of the other assets.

The courts used to decide that the woman and her children would stay in the home while the husband took out a mortgage on a property elsewhere. Following the Mortgage Market Review, which introduced very strict ‘affordability’ criteria, it isn’t as straightforward.

‘If the husband is asked to pay maintenance their ability to buy a new place is curtailed. The wife might have to accept a smaller chunk of the house or less maintenance,’ says Kay Ingram, a director at national advice group LEBC.

It’s also possible for one party to buy out the other party’s share, which could necessitate a new mortgage.


In England and Wales investments are usually split 50/50, whereas in Scotland the courts look at the assets that were acquired during the marriage.

Corcoran says when couples are dividing up different types of assets they need to consider access to funds, charges and tax implications. All investments are treated differently for tax and need to be reviewed to ensure they’re still appropriate. For example, unit trusts and shares are liable to capital gains tax on encashment, whereas encashing investment bonds can result in additional income tax.

‘Complicating factors often come into play – for instance let’s say one party has an ISA and the other party has a drawdown pension, both worth £100,000 each,’ says Corcoran. ‘You would think they would be worth the same and cancel each other out, however when dividing up assets for divorce the ISA may be deemed to be worth more. Any withdrawals would be tax-free, whereas any income over and above the pension commencement lump sum from the drawdown would be taxable. All these issues need to be considered carefully.’

Divorce proceedings themselves could decimate the level of your investments and pensions, which could throw your financial plan completely off track. Patrick Connolly, certified financial planner at Chase de Vere, says this will be most problematic for older people who have less time to make up any shortfalls.

‘Following divorce, people should take an entirely fresh look at their finances,’ says Connolly. ‘They need to review what assets they still have, their new level of disposable income and then what steps they need to take to get their financial planning arrangements back on track. In many situations this can be a long and painful process.’

LEBC’s Kay Ingram says it’s extremely important to fully disclose all your assets during divorce proceedings – otherwise you’ll be held in contempt of court and could face jail. The courts will also look less favourably on you when deciding the settlement if they discover you withheld information.


There are several ways in which pensions can be split at divorce, but the three most common are offsetting, earmarking and sharing.

Pension offsetting is where the value of your pensions is offset against other assets that you own. For example, in exchange for keeping your pensions, your ex-partner could get a larger share of the family home or share portfolio.

The advantage of offsetting is its simplicity, but there’s a danger that if a non-working spouse receives more of the property and less of the pension they could end up with no funds to live off.

Pension earmarking is an agreement that when you start to draw your retirement benefits, a portion is paid out to your ex-partner. If you receive £50,000 a year from your pension and the agreement is to split this equally, your ex-partner would receive £25,000 a year.

Joshua Gerstler, financial adviser and company director at financial advice firm The Orchard Practice, says the disadvantage of earmarking is that if you die before taking your pension, your ex-partner could receive nothing or, if the pension does not grow, less than expected. The ex-spouse has no control over where the pension assets are invested.

‘Some couples do not like this method as it keeps their finances entwined when they are looking for a clean break,’ Gerstler adds.

Pension sharing is when the court sets out what amount of your pension your ex-partner is entitled to. It is usually expressed as a percentage of the transfer value. Normally your pension provider will want your ex-partner to transfer this into their own pension.

Pension sharing gives more control to the ex-spouse than earmarking because they are able to manage the investments and choose how and when they take the benefits.

‘Once again you need to be careful as some pensions have other benefits, such as guaranteed annuity rates that could be lost on transfer, so these need to be carefully considered. Also, where the spouse is younger they will not have access to the lump sum/income until they turn 55,’ Corcoran says.

David Trenner, technical director at Intelligent Pensions, says consideration needs to be given to spouses’ differing attitudes to investment risk and their requirement for flexibility in their pensions.

‘An ex-spouse who does not want to take risks but just wants a guaranteed income could be disappointed when she finds that her ex-husband’s scheme will only allow her to transfer the value of a pension share into a personal pension where she must take investment risk as well as inflation risk and mortality risk.

‘Conversely, an ex-spouse who wants to have flexible income and be able to control the investment of their pension will be disappointed if the only option is to get a guaranteed pension from her ex-spouse’s scheme,’ he explains.

Planning ahead

It’s essential that you decide how your assets will be split before you receive your decree absolute (the court order that officially ends your marriage). On death pensions are paid to the dependant spouse, not ex-spouse, so if the main pension holder dies and an agreement hasn’t been finalised the other party could be left with nothing.

If you have life assurance or death-in-service benefits which name your ex-spouse as the beneficiary these should be updated. You should also ensure your will and/or power of attorney is up-to-date after the divorce.

This article is provided by Shares Magazine. Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters and does not guarantee the accuracy or completeness of the information in this article.

Investors acting on the information in this article do so at their own risk and AJ Bell Media Limited and its staff do not accept liability for losses suffered by investors as a result of their investment decisions. Shares is published by AJ Bell Media Limited part of AJ Bell.