Scotsman money: get financial house in order when seeking separation

Celebrity divorces make the headlines, but it’s not just the rich and famous who can face long, difficult and expensive separations.
Image: Adobe StockImage: Adobe Stock
Image: Adobe Stock

Scotland has a divorce rate of about one-third of all marriages, and experts advise people to spend time getting their financial house in order, despite there being many other things to deal with in a period of upheaval.

Tom Munro, financial planner with McHardy Private Wealth, says: “The main tips I would offer to avoid big financial losses is to carefully plan for the future. I find the main focus should be on assets, income, debts, and financial agreements made during the marriage, because one of the most common financial implications of divorce includes the division of assets and liabilities.

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“Some of the main financial oversights I see repeatedly arising when people are going through separation is failure to update important items such as wills, trusts, and beneficiary designations to reflect their new circumstances and, more importantly, to ensure assets are distributed according to their wishes in the event of them passing.”

Tom adds that by taking proactive steps and seeking professional guidance, individuals can minimise financial losses during this highly sensitive and challenging phase and plan for a secure financial future.

Ian Morrison, chartered financial planner at Calton, recommends couples engage a good, trusted financial adviser to work with legal professionals early on. He urges people not to underestimate the emotions and vulnerability of the situation: “Seek help and, if unsure, hold off making long-term decisions until you know more clearly what you want to do and what the future holds.

He cautions: “Pensions are often dismissed, often due to a lack of understanding and unwillingness to engage with a potentially complicated topic which seems so far away – particularly when you have immediate pressing needs which are likely absorbing a lot of your mental capacity at the time.

“Yet, a pension could be a huge asset and may impact your financial options now and in later life. If you are unsure, then ask your adviser to explain this and what the implications are for pension sharing, splitting, earmarking.”

Ian’s tips are to “think big picture” and do cashflow modelling to see how separation will affect income – likely to decrease – and outgoings – likely to increase – to understand the new reality, post-separation.

“Having a plan, or range of plans, prepared before you go into the financial negotiations will provide powerful insight to what your options are, how they will affect you, and ultimately give you the power to make informed decisions on the front foot,” he adds.

Lesley Irvine-Rae, financial planner at Waverton Wealth, says adjusting to a single-income household and considering the long-term impact on retirement savings of a separation are crucial. She adds that for women – who often face significant financial changes post-divorce – understanding these areas is important for future financial stability.

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Her guidance for avoiding financial losses includes budgeting – thoroughly analysing the current financial situation, listing all income, expenses, assets, and debts – to help form a realistic plan.

Lesley also recommends setting up an emergency fund to cover at least six months of living expenses. This can be vital for handling unexpected financial burdens without incurring debt.

In addition, she says reevaluating insurance needs, including life, health, and property, will ensure adequate coverage for the new circumstances.

She adds: “Stay informed and proactive. Understanding all aspects of your financial situation, including potential tax implications and credit responsibilities, is crucial. Proactively managing your finances, rather than reacting to situations as they arise, will provide better outcomes.

“While immediate financial security is important, also consider the long-term impacts of your financial decisions during divorce negotiations. Planning beyond the immediate future can help ensure stability and security in the years to come.”

She concludes: “Overall, effective financial planning during and after a divorce is key to securing your financial independence and stability. It empowers you to make informed decisions and navigate the transition with confidence.”

According to Ross Leckridge, chartered financial planner with Aberdein Considine, in the event of a separation, it’s almost inevitable that financial plans will need to be torn up and re-drawn.

“The best place to start again is back at the drawing board, considering new financial needs and objectives. You need to create a new blueprint for what you want life to look like, so you can set about building that life,” he explains.

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“Many often under or overestimate how much money they need because they’re making decisions on a whim. One of the greatest benefits of creating a new financial plan during the separation process is that it helps you find ‘your number’ – the figure needed to allow you to move forward with your new life. Then, negotiations can become a lot clearer.”

The division of assets can often become something of a battleground in a separation, Ross warns. It is therefore essential that people properly understand what’s at stake, and that means understanding the nature of the financial assets in play.

He says: “Back in the March 2004 Budget, Gordon Brown attempted to bring about pension simplification [but] 20 years and several iterations later, pensions continue to be some of the most complex personal finance instruments.”

Leonie Burke, partner in the Edinburgh family law team at Aberdein Considine, explains that pension interests are very often some of the most valuable assets in a marriage, and there has been specific provision in the Family Law (Scotland) Act 1985 for pensions to be shared since 2000. However, she says her firm still comes across cases where a separating couple will propose to agree not to include pensions in the assets to be divided.

“But agreeing to disregard your spouse’s pension from the matrimonial property pot would be contrary to legal advice,” Leonie says. “A pension is a tax-efficient savings plan which will provide you with an income on retirement, and its value cannot be understated.”

There are other options to look at that might ease financial – and other – pressures during a break-up. Tom Munro says it may be beneficial to consider mediation or alternative dispute resolution to reach a mutually agreed settlement.

Danielle Stevenson, senior associate in family law at Anderson Strathern, believes using mediation or collaborative separation are the best ways to save money, stress, and time.

She says: “There are many benefits to using mediation or collaborative separation, rather than the more antagonistic court process. It’s usually much shorter, and the legal costs are significantly reduced. It can also help dampen the level of hostility between parties too, as these options focus everyone on working together and being more positive, rather than confrontational.

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“With both mediation and collaborative separation, the key thing is that both parties must be committed to finding solutions that work for both of them. If that’s the case, in my experience the process usually works well.”

Stevenson explains that mediation is when both parties meet with an independent and impartial mediator who will help them reach an agreement, whereas collaborative separation sees each party instruct a solicitor trained as a collaborative lawyer, and then all four discuss solutions together. A financial adviser and/or a relationship counsellor can also attend.

Stevenson says: “If you can’t reach an agreement and you decide to raise a court action, both solicitors must step aside and let you find new representation. This means they should be fully invested in working together to find an outcome to benefit both.

“This is the opposite of what can happen when the two parties battle hard against each other, which can end up prolonging the process and ultimately costing a lot more money.

She concludes: “In terms of which option is best, it depends on the specific situation and the parties involved – however, both options allow parties to retain control over the outcome of their separation, which is ultimately lost when the court process is entered into, because a third party [the judge] will make the decision for you.”



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