Sorting out your finances when a relationship ends

Breaking up is rarely easy to do, either emotionally or financially, but there are ways you might be able to make separating your finances less painful.

The pressure of lockdown has driven many couples apart, with law firms reporting a surge in enquiries from couples looking to separate. Co-op Legal Services, for example, has reported a 300% increase in divorce-related enquiries in the last six months to the end of July this year, compared to the same period last year.

Here are some of the things you might want to consider if you’re splitting up from your partner. Bear in mind that these situations are often complicated and highly emotionally charged, so if you need help, it can be a good idea to seek mediation or, if you’re unable to resolve things that way, professional legal advice. For more information on mediation, or to find your nearest mediation service, visit the National Family Mediation website. Alternatively, you can find a solicitor with the help of Resolution, a membership organisation for professionals who work with separating couples. All members commit to taking a non-confrontational approach to help couples resolve their issues.

Alternatively, if you’re finding your relationship difficult but aren’t ready for divorce, relationship counselling may be an option worth considering, if you haven’t already. You can find a professional counsellor near you on the Counselling Directory

Debts

dealing with debt

Dealing with your debts should be one of your top priorities when separating. If a debt is in joint names – perhaps you have a joint credit card, or took out a loan together, then the creditors can pursue either one of you for the debt. That means if one of you decides to stop paying, the other will have to pick up the bill.

It’s therefore a good idea to try and pay down any joint debts as soon as possible or work out a way to divide what you owe so that one of you is responsible for repaying certain debts and the other the rest. If you are transferring debts into individual names, both of you will usually need to notify the loan or credit card provider that you want this to happen.

Once you no longer have any joint credit accounts, and have also separated your bank accounts, you can check to see whether your finances are still linked to your ex-partner by checking your credit records with one of the main credit reference agencies, which include Experian and Equifax and CallCredit.

If these records show you are still linked, you can ask the credit reference agency to amend their records so they show you are “financially disassociated” from your partner. You’ll need to provide proof that you’re no longer financially linked to your former partner, for example a letter from your bank showing that your account is now held in your sole name rather than jointly.

You don’t have to wait until you’re officially separated or divorced to financially disassociate yourself from your ex – you can do it as soon as all joint accounts are closed and any mortgage or other credit arrangements are no longer held in joint names.

Pensions

When you split up from your spouse, there are usually three main ways to deal with any pensions you have.

Pension sharing

Pension sharing is often a common way to ensure each partner ends up with retirement savings after divorce, especially if only one spouse has contributed to a pension. Pensions are split at the time of divorce or dissolution, giving each partner their own pension pot for the future and ensuring that both parties can have a clean break from each other. The partner who has the pension can either keep their share in their current pension scheme, or have it moved to another pension scheme of their choice. As this is a transfer and not a new contribution, it won’t soak up any of your Annual Allowance (the amount you can pay into your pension in a tax year and earn tax relief on.) The other partner can put their share into a personal pension of their choice.

The value of pensions is offset against other assets

Another option is for pension assets to be offset against other assets of the divorcing parties. For example, if you have a pension and your partner doesn’t, you could allocate assets of the same or similar value to the pension involved, to your partner and you keep the whole of the pension. Again, this allows both parties to have a clean break.

One of the problems you might come up against if you’re thinking of pension offsetting is that it can be difficult to value some assets and split them fairly, so you may need professional advice from a financial advisor to help you work this out.

Pension attachment order

A pension attachment order (known as a pension earmarking in Scotland) occurs when some, or all of the pension benefits of one partner are ordered to be paid to the other. These are only paid direct to the former spouse when the pension rights come into payment, so you’ll only receive a retirement income when your ex decides to retire.

The biggest challenge with this is that it can make it harder to plan financially, as you won’t be fully in control of your own pension income. You may want to take money on a different timescale to your pension partner. Another potential downside is that any payments will stop when the spouse or partner with the pension pot dies, or if the person receiving the earmarked pension remarries. Due to these complications, pension attachment orders or earmarking is rare, with most people opting for pension sharing instead.

What happens to your State Pension?

Since the new State Pension was introduced in April 2016, the amount you’ll get at retirement will depend on your NI record alone, so divorcing won’t have any impact on your entitlement.

If you have a ‘protected payment’, which is an additional payment you may get on top of the full State Pension, a court could order that this is shared between you and your ex.

If you reached State Pension age before 6 April 2016 and are eligible for the basic State Pension instead of the new State Pension, this also can’t be shared if your marriage or civil partnership ends. However, as a way of trying to increase the total amount of assets available to share, you can potentially use your former spouse or civil partner’s National Insurance contributions to increase your basic State Pension without affecting the amount of State Pension they receive.

If you have an additional State Pension – an extra amount of money you could get if you’re a man born before 6 April 1951 or a woman born before 6 April 1953 – a court could order that this is shared between you if your marriage or civil partnership ends. These rights will end if you remarry or enter into another civil partnership.

You can find out how much State Pension you’re on track to receive by requesting a State Pension statement.

Property

Often the main home needs to be sold if you’re separating from your spouse, as two properties will be needed rather than one.

This may mean that each partner needs to downsize, so if this applies to you, you’ll need to think about how you’ll divide up any furniture and what each of you will need. When selling, legal costs, estate agency fees and any mortgage early repayment charges will all need to be factored in to any budgeting for new properties.

If there are dependents still living in the family home, it may be that one partner will remain there. However, you may not be able to simply transfer ownership from joint names into one if this is the case, as the lender will need to see evidence that the person staying in the property will be able to afford the mortgage repayments on their own. If you’re receiving maintenance income from your partner, some lenders, but not all, will factor this into their affordability assessment. Fee-free mortgage brokers such as Habito, London & Country Mortgages or Trussle should be able to talk you through your available options and let you know which lenders may be able to help.

Update your will

When you divorce, you may need to update your will, so that when you die, your estate goes to who you want to it to, and not to your ex partner.

You can either arrange this by contacting the solicitor or will service which originally provided your will, or you may decide to create a new legally binding will online. Find out more about wills and how to go about writing one in our article The importance of writing a will.

Finally...

Getting to grips with your finances when you’re going through a divorce can be difficult, especially if your ex-partner has previously looked after this side of things on your behalf. However, knowing your rights and understanding what you need to do to manage your money independently can help you feel much more in control. You can find out more about the divorce process and your finances here.

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