What divorcing couples need to know about a financial split

Strains on relationships can grow during the festive season and can send some marriages or civil partnerships to breaking point. As a result, over the years solicitors have noticed a spike in enquiries regarding divorce in early January, and particularly on the first working Monday of the year.

This day, which has come to be known rather grimly as ‘Divorce Day’, this year fell on 6 January 2025. Of course, the breakdown of a marriage can be a challenging, emotional time, but it can also have a significant impact on your finances.    

 To people having to make the difficult decision to divorce, Ben Glassman, Financial Planning Partner and Head of Family & Divorce at Evelyn Partners, says, “Couples should not leave financial issues to the last minute when considering separation or divorce – it’s an aspect of the relationship that can cause some grief in this difficult process, so really it’s worth getting a handle on it right from the start, preferably with the help of some good financial advice.”

Here, we’re looking at some of the key financial aspects that you should know if you’re considering divorce.

No-fault legislation enacted in April 2022 means that couples can now divorce on the grounds their marriage has irretrievably broken down, without the need to attribute blame.

 This less confrontational system can help crucial decisions on the splitting of assets to be made with a bit more clarity and harmony. The new system does not, however, seem to have led to an increase in the number couples taking the divorce route – Family Court statistics show no strong trend, with the most recent quarter revealing a 6% annual drop in divorce applications¹.

But this change in legislation doesn’t remove one of the biggest issues for many couples when it comes to divorce. That is, the financial situation for those involved, which is often a major concern both during and after the separation process.

Glassman says, “The ongoing elevated cost of mortgages, alongside the generalised increase in the cost of living in recent years, has made separation for some couples an even trickier financial conundrum than it had been previously. For those who do decide to break up, the fate of the family home and the splitting of financial assets like pensions are often some of the most difficult issues to reach agreement on.” 

The key to minimizing the financial pain of a divorce is to understand the rules and follow some key principles.

While no-fault might help more couples avoid costly legal exchanges over the separation itself, the temptation is to try and ‘go DIY’ over the whole process, including the financial settlement.

But the biggest legal bills generally occur when there is a dispute over the financial settlement, which is a separate matter to the divorce itself. Not only can the financial settlement incur higher legal fees, but it can also drag on for a long period. An agreement over the splitting of assets,  preferably arrived at during the early stages, is important if both people want to minimise stress and expense.   

For many couples to achieve this, advice from a financial planner with experience of divorce will be invaluable, particularly where pensions or other complex matrimonial assets are concerned. 

In reaching a financial agreement, a court usually considers a 50:50 split as a starting point for a marriage of more than five years as set out in the Matrimonial Causes Act 1973. This covers property, pensions, savings and any child maintenance.   

With that said, it’s not always possible or practical to split every asset down the middle. It’s also further complicated by the fact that each asset is not always equal based on their current value. For example, £10,000 in a tax-effective wrapper like a pension or ISA has a higher after-tax value than the same amount in a taxable investment or savings account.  

Property is usually the biggest asset in many households, and if one partner wants to stay in the family home, they will often have to forgo the majority of the other assets such as savings and pensions.

One person often wants to hang on to the family home when getting divorced, especially where children are involved.  But keeping the home doesn’t always make financial sense when taken into context with other assets. A property you live in doesn’t produce an income and parts of it can’t be sold to meet spending.

However, higher mortgage rates have narrowed the options for those who need to borrow to buy a new home, as many divorcees do. Elevated mortgage rates can make finding a solution to the property conundrum for some divorcing couples a lot more challenging.   

If there is no option but to sell the home, this could also mean having to pay an early repayment charge if the mortgage was fixed. However, it is often feasible for one party to port an existing fixed mortgage and some lenders even allow couples to split and port a fixed rate loan.

Pensions are an area that can either be overlooked or become a source of confusion and dispute at divorce, especially when one spouse has a much greater pension provision than the other. They are often the biggest marital asset after property, and sometimes even the largest, making up 42 per cent of household wealth, according to the ONS². 

Pensions can be easily overlooked or undervalued, especially defined benefit schemes which can be far more valuable than they first appear.

Glassman says, “We have seen the average age of a couple getting divorced rising, and alongside pension freedoms introduced in 2015 this has created a greater emphasis in recent years on pension assets in divorce settlements. When a couple are closer to retirement, pension pots are likely to be at their greatest value, and the issue can become contentious when, as is often the case, one person holds the majority of pension wealth.”

Understanding pension sharing orders

Splitting or sharing pension assets is much more complicated than for cash savings and will be influenced by the type of pension it is and the relative ages of the divorcing couple.

The old ‘earmarking’ option is where the non-pension holder receives regular payments – which will cease on the death of the former husband, wife or civil partner - but the asset remains firmly in the hands of the pension saver, who will be liable for tax. This option is very rarely used now and has given way in many cases to splitting or offsetting the pension.

Glassman says, “When a pension is split the non-pension holder is awarded a share of the asset, which then becomes their own, so they gain control of how they use it, and are no longer tied to the original pension holder.”

“A pension can also be dealt with by offsetting it against other assets, but this can involve often complicated calculations as to the ‘real’ market value of the pension. As such it might be a more usual option among younger couples, who will not have had the time to build up significant pots. Where an individual sees a reduction in their pension pot, it might prove difficult to rebuild.”  

Particular difficulties and confusion can arise over defined benefit pensions in a financial settlement. These valuable pensions provide a guaranteed income for life and need careful consideration on how they should be valued and split for matrimonial purposes – not least because different schemes use different valuation calculations. 

Glassman says, “Even when a defined benefit pension has been valued, the question remains as to how it might be shared or offset. These issues have been complicated still further by recent volatility in the bond market, as defined benefit valuations depend in part on gilt yields. As these soared to their highest in 15 years last year, defined benefit valuations have plunged and in some cases nearly halved.

State pensions are also important, adds Glassman, “Women especially often have gaps in their career, which could affect their state pension entitlement. It’s important to obtain a projection, particularly when looking to equalise the pension entitlement of the two people. The value of a guaranteed, inflation-linked income from age 66 (currently) until death is not to be underestimated.”  

Asset values understandably garner most of the attention when discussing a financial settlement, but the tax position of each of these assets is arguably just as important. Whoever ends up with the asset in the split is going to have to deal with the tax consequences at a later date, so it’s vital to understand the full picture.

Inheritance tax (IHT)

In the October 2024 Budget, the Chancellor announced that as of April 2027, pension pots will form part of an estate for inheritance tax purposes. This will require a lot of attention to ensure that pension assets are split in a way that takes into account their true tax position.

The changes are subject to a consultation, so nothing is guaranteed yet. However, the consultation is mainly around the complex administration that will likely be required by executors and pension trustees as the overall IHT liability would need to be separated between pension and non-pension assets. 

“This could require a big rethink for those preserving money in pensions and could lead to changing preferences over how assets are split among the two parties in a divorce,” adds Glassman.

Capital gains tax (CGT)

Transfer of assets between married people or those in a civil partnership takes place on a ‘no gain, no loss’ basis for CGT purposes, so that no tax is crystallised on the transfer, with the receiving party effectively taking the other person’s base cost. This rule used to apply only up to the end of the tax year of permanent separation.  

Since 6 April 2023 this treatment is available for up to three tax years after the end of the tax year of separation – or for an unlimited time when the assets are transferred as part of a formal divorce agreement.  

This will provide divorcing couples with more time and flexibility to arrange their financial affairs under the settlement. Changes to the rules around private residential relief also mean that a party who retains a share in the family home will be able to claim relief from CGT on any profits they make if the home is sold to a third party – even if they have since bought another home.

Even so, it’s important to understand the real value of asset settlements under a divorce, taking  into account the final ‘net of tax’ position.  

Even where couples are truly amicable and wish to ensure their wealth is split in the fairest and most tax-advantageous manner, involving a financial planner can save substantial amounts of money. This is particularly true where there are significant pension assets involved. The new proposed rules on pensions and inheritance tax from 2027 make sound advice even more important.

When it comes to navigating a financial split, our financial planners are here to help. You can book a complimentary initial consultation online or call 020 7189 2400.

¹ GOV.UK, Family Court Statistics Quarterly, September 2024

² Office for National Statistics, Household total wealth in Great Britain, March 2020