Money: Don't let divorce drain your coffers

Breaking up is hard to do, especially where finances are concerned. By Andrew Couchman

Separation and divorce are stressful situations and, even between two well adjusted, otherwise normal people, passions can become inflamed; what started as an amicable split can easily degenerate into an acrimonious shouting-match. Or would, if the two parties were still talking to each other.

In financial planning terms, many people feel that all their sensible planning has been wasted. Few people have the foresight to know that a relationship may not last, and understandably few plan in advance for a possible separate in the future. Mostly, planning for divorce means making the best of a bad situation.

In most relationships the partners' financial affairs will be far from equal, with the added complication of maintenance payments usually going to the party who has custody of the children. There is no blueprint for settling matters and any agreement is best decided by the parties themselves rather than by the courts, not least in order to minimise the cost of any agreement.

Two key areas to sort out are pensions and life assurance. Pension planning, and in particular the rights of non-working spouses, has been much in the news. But such rights have existed since the 1973 Matrimonial Causes Act, although more recent and proposed legislation aims to make matters more straightforward.

When it comes to pensions, the key is to get good independent advice, according to Keith Popplewell, of the Divorce Corporation, a company that specialises in helping solicitors in this complex area.

There are many areas where couples fail to do the right thing because they, and perhaps even their solicitors, have insufficient knowledge of the complexities. Keith Popplewell cites a recent example, where a non-working spouse had insufficient National Insurance contributions to entitle her to a basic state pension when she retired. The Divorce Corporation advised the woman to write to the DSS to claim her ex-husband's contribution record - 36 years in his case - without in any way affecting his position.

"In fact, he benefits too, because otherwise he might have had to pay her more maintenance when she retired," says Popplewell, but this option does not apply if she remarries.

Another area where both parties may be able to benefit is in claiming the additional personal allowance that single parents enjoy. The higher married couples' allowance falls away in the tax year after separation, but whoever has custody of the children may claim an additional personal allowance.

This benefit must be claimed, and it is best to nominate the youngest child in order to gain the longest benefit. However, where there are two or more children, the other partner can also claim an additional personal allowance provided that they nominate another of their children. The child must regularly stay with them, have a bed to sleep in, and keep personal possessions in their home.

Many things have to be split on divorce, and a surprising addition to the list may be the couple's financial adviser, says Len Warwick, of the Cheltenham-based independent financial advisers (IFA) Warwick Butchart Associates. "On separation or divorce the same adviser cannot satisfactorily advise both parties," he says. The time to involve your IFA is before the divorce is finalised.

If you have jointly owned policies, the advice is to keep them going but to assign them to whoever should get the benefits, he advises. "That helps to ensure that the right party gets the proceeds and also that they are informed if premiums stop for any reason."

Keith Popplewell says that where one party is paying maintenance, there should be sufficient life cover to ensure that if that person dies the value of the maintenance payments can continue. "You may be able to claim against your ex-spouse's estate, but the courts tend to put the new family first, and going to law can be expensive," he says. Instead, he recommends setting up life assurance as part of the settlement and recommends that your IFA and solicitor work together on that.

Len Warwick agrees, adding that a will is invalidated on divorce, but not on separation, and that it is usually bad advice to stop any existing life policies. "Many people understandably do not want their ex-partner to be part of their ongoing planning, and that can effectively be achieved through an assignment of the policy" he says. "On a joint life policy it is not usually possible to remove their name, but if they die first there is a windfall, in that the policy then pays out."

Separation or divorce is a time when professional financial advice is essential. So often the heart rules the mind, but taking action without having the consequences fully spelled out can be extremely costly for both parties. While it may be tempting to cut off the ex-spouse wherever possible, the key to financial planning is sorting out the ownership rather than worrying about whether their name continues alongside your own on the policy.It is also a time to ensure that your IFA and your solicitor work together, each using their expertise to ensure that your future plans are built on the strongest possible base.

The Divorce Corporation: 0114 235 1347; Warwick Butchart: 01242 584144. For a list of independent financial advisers near you, call IFA Portfolio on 0117 971 1177. Andy Couchman is publishing editor of `HealthCare Insurance Report'