For richer, for poorer...now economy adds to the pain of divorce

The 'big split' is tough at the best of times, but the uncertain financial climate is forcing a rethink in attitudes, says Neasa MacErlean

Getting divorced during an economic downturn can be a financial nightmare. As a result, many couples have put divorce on hold in recent years – but family lawyers are now reporting an upsurge in numbers with people deciding to wait no longer.

However, unless you are very wealthy, there are major obstacles blocking a financial agreement that satisfies both parties in a divorce settlement. As a result, couples are being forced to change their attitude to divorce arrangements.

Andrew Newbury, Manchester-based family lawyer at solicitor Pannone, says a quarter of his cases now relate to divorcing clients who came to see him a few years ago. "People have decided that they can't put things on hold forever," he says.

Meanwhile, Bristol-based Alison Hawes, family lawyer in solicitor Irwin Mitchell, reports the same trend: "In 2009/10 they were waiting. But I've noticed a difference over the last year. People are thinking now that if they wait, they could wait forever."

In the last few years she has even had to draw up some house-sharing agreements – the type that students sometimes use to say how they share the fridge and the living room – for people who could not afford to divorce and who had to stay on in the same house.

The couples who are really suffering, says Hawes, are "the squeezed middle", those who might have been financially secure together but who struggle to get the money to buy each other out. From his perspective, pensions expert Robin Ellison of solicitor Pinsent Masons, agrees. Talking of cases where couples can divide one of their pensions, he says: "Instead of having one small pension for a couple, you get two small pensions."

One major change from the past is the difficulty of producing clean break settlements. "The clean break has become a bit more of a myth, particularly where there are children," says Mairead McKeevor, St Albans-based family mediator at Harmony Mediation. "Where there are children it's almost completely impossible to have a clean break unless there are very substantial assets." Both Andrew Newbury and Alison Hawes are seeing a decline in clean breaks simply because neither party has the cash nor the ability to borrow enough money to buy the other one out.

Clean break settlements have been the preferred solution since 1984 when courts became obliged to consider that option. Now, however, couples are having to be innovative in order to get a settlement, and that often includes keeping some kind of financial relationship continuing between them.

For instance, so-called Mesher orders – where the departing spouse, usually the husband, keeps an interest in the family home until the children reach 18, are now becoming popular. Alison Hawes is not keen on these: "The man (in most cases) retaining an interest in the house is something we have always tried to avoid. It catches up with you later: the wife ends up trying to get a mortgage in her 50s which is nigh on impossible."

But Mairead McKeever says this kind of arrangement is returning with a vengeance. Instead of the traditional set-up in which the husband retains partial ownership of the home until the youngest child is 18, a new, longer version is coming in. "A lot of people are having to look to postponing it to when the youngest child is 22 or 23," she says. "Lots of young people are very much dependent on the family these days to provide them with a home."

Where family businesses are concerned, valuations are extremely difficult to make – so a trend is developing where (in most cases) the wife becomes a shareholder in her ex-husband's business.

Looking at the pension side of the deal, Robin Ellison is concerned that wives in particular are getting short-changed. Traditional valuation methods of pension rights understate the likely true value in many cases, he says. The way this happens is explained at www.penfam.co.uk –the website that he set up with two other specialist solicitors.

Essentially, the valuation methods for final salary and other defined benefit schemes are often cautious and do not take into account all the expected future salary rises and other benefits. The real value "is usually much higher than the CETV (the 'cash equivalent transfer value' method which is most widely used), particularly for younger scheme members", according to PenFam. These pensions are particularly common in the public sector. Individual spouses and couples can take specialist advice in order to get a fairer valuation of their defined benefit pensions. (There is less need for defined contribution pensions where the value is far simpler to work out.) But even quite decent pensions can become inadequate when divided out. Ellison says: "Once the pension is factored in, some couples will decide to stay together. The pension rights are usually worth more than the house."

Couples need to be careful to ensure they tie up all the financial issues in their divorce settlements. "They usually include a declaration that each party will not make a claim on the other person's death," says Fay Copeland, wills specialist at London-based solicitor Wedlake Bell. If this is missing, it could be possible for a former spouse to claim a share in their ex's estate under the Inheritance Act 1975.

One silver lining to all these difficulties may be that divorcing couples are often co-operating better with each other now than they did in the past. In April this year, a new rule came in for England and Wales requiring splitting couples to go to mediation as a way of avoiding going to court.

Andrew Newbury says that the majority of divorces are more civilised nowadays. They are also using lawyers and mediators in a different way. "For divorce lawyers, the role is becoming more about giving advice at the outset than about running it day to day," he says. There is also less tit-for-tat. "I write fewer letters than I did two years ago," he says.

Case study

"If we had stayed together I would have retired at 60," says Nicola. But she is now nearly 62 and thinks she will have to carry on teaching until 65. Nicola and her husband, also a teacher, separated four years ago after more than two decades of marriage. They also have two children who are just out of their teens.

The couple could have got the paperwork done and divorced before now but Nicola's husband, Steve, agreed to pay the court fees (£385 in total) and says he does not have the money to hand.

When they split, they went for one free session of mediation. There they learnt the procedures they needed to follow to take them through to divorce. Wanting to avoid paying for lawyers, pension valuation specialists or more mediation, they agreed to do it themselves. They decided to exclude future inheritances from their financial settlement. That left the house and their two pensions to be divided up.

Most couples are best advised to get valuations from three surveyors on a house, and that is particularly important in a time of uncertain property prices. Nicola and Steve took this route and averaged the valuations they received. For their pensions, they went through the standard route of getting a valuation (a 'cash equivalent transfer value') from the administrators of their scheme.

His pension valuation came out as being about three times as big as hers because she had taken time to look after the children while he pursued his teaching career and got various promotions. They agreed to add the value of their pensions and the house and divide by two to get their shares.

Although she is relieved that a sparkless relationship is over, Nicola is finding life tough financially. She wanted to keep the family home and that meant that she kept the mortgage. In three years' time she will have to repay more than £120,000 to the lender when the loan finishes. "I have sleepless nights thinking what I will do," she says. She will be able to do it but it might involve major cutbacks or taking a loan against the lump sum she will get on her pension. She drives an old car, and notices all the costs she incurs far more than when she was still with her husband.

Delaying the settlement has added to her stress. She fears that if she was run over by a bus, her husband, now living with someone else, might still inherit the family home. And Fay Copeland, head of the private client, tax and trust team at solicitor Wedlake Bell, confirms that this is the case. She explains: "Separation has no bearing on your will. If you have an existing will and you die, your spouse is still fully entitled to claim their inheritance." Without a will, the intestacy provisions kick in, meaning that Steve would inherit the first £250,000 of her estate. Nicola has no will, and the house is probably worth under £250,000.

Nicola is determined to sort out the divorce and the financial settlement. She says: "I would hate to be going through all this financial hardship only for the house to go back to him."

Nicola and Steve are not their real names.

Find out more

Direct Gov: www.direct.gov.uk

Harmony Mediation: www.harmonymediation.co.uk

PenFam: www.penfam.co.uk

Resolution (association of family lawyers): www.resolution.org.uk