The Financial Implications Of Divorce
15th September 2013 Penny Lovell
Divorce can prove to be expensive, and not just in terms of legal fees.
Divorce can prove to be expensive, and not just in terms of legal fees. It is estimated that when Madonna divorced Guy Ritchie, it cost her $90 million. Press reports claim that divorce cost Tiger Woods $100 million, Roman Abramovich $300 million, and Rupert Murdoch an eye watering $1.7 billion.
According to the Office for National Statistics, more than 40 per cent of first marriages end in divorce. It's no wonder that ‘pre-nuptial’ agreements have become increasingly common for the rich and famous.
The financial implications of divorce can be very far reaching, and have a long-term impact.
It will often take a court to decide how the wealth and income will be split, and the wife is likely to be favoured in a court settlement if there are dependent children involved, who are living with their mother. The court will also assess how long the couple have been married, and how each partner contributed to the building of their wealth.
But there are longer-term impacts of divorce that are rarely considered.
Almost inevitably divorce leads to a faster dilution of wealth, which is likely to impact future generations. There is an old saying of ‘clogs to clogs in three generations.’ In the majority of families that accumulate wealth, perhaps through creating, building and then selling a business, it takes just two more generations to lose it again. Much of it is wasted through not drawing up a proper succession plan. It is diluted when it is divided among children through inheritance. And then there is divorce. As couples split up, and often remarry, the dilution of wealth is exacerbated, as more people can claim a share of the inheritance.
Pensions also play a major role in a divorce settlement as it is often the second, or even the biggest, asset following the family home. If one of the partners in a divorce doesn’t work, then they will need to be provided with an income for life – unless they remarry or find some other means of support.
In this instance, part of the pension will be set aside to provide a pension to the non-working partner so they have something to support their living costs. Three courses of action are available:
Pension sharing gives the option of a clean break and is the most common outcome in which an agreed portion of the value of the current pension investment is transferred to the ex-partner to establish a new pension plan. This is called the ‘cash equivalent transfer value’.
Pension offsetting has the value of that investment ‘traded’ against other assets so there is parity of value across all the marital assets.
Pension earmarking sees part of the pension allocated to the ex-partner for when they retire. However, the ex-partner does not receive the money until the main/working partner retires. AS with any investment, there is the risk that the value of the pension pot may decrease or that the ex-partner never receives their pension if the pension holder dies before reaching retirement. This method is rarely used.
The sad thing is that the financial wrangling can go on for months, or even years, adding to the emotional stress and hurt that divorce inevitably brings. What it highlights, though, is the need for the right advice. Not just the legal advice, that helps to bring about a financial settlement, but the right tax advice, and good ongoing investment advice, to make the most of your assets for this generation and the next.
Penny Lovell is head of client services at Close Brothers Asset Management