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Divorce is a fact of life for many people across the UK looking for a new beginning, but some startling new research has shown that divorcees are facing a later life of hardship because they’re failing to talk about their finances. We’ve delved into the research results and highlighted where financial planning can make a difference.
Divorce rates have slowed down in the UK in recent years, but 2 in 5 married couples divorce before they reach their 25th wedding anniversary, according to the Office of National Statistics.
If we consider the average age of getting married for opposite-sex couples was 38.1 years for men and 35.8 years for women in 2018, when the latest statistics were made available, there are lots of people facing into their late working / early retirement lives while separating from their spouse.
As financial planners, our purpose is not to get into the reasons why, but given that divorce and separation are prevalent for people, we want to look into what happens when couples get divorced and how financial planning can protect divorcees and limit the financial and emotional impact.
Highly stressful
The ‘Holmes and Rahe stress scale’ was created in the aftermath of an experiment done in 1967 by two psychiatrists who surveyed 5,000 medical patients about 43 life situations. They concluded that divorce is the second most stressful life event after death of a spouse. Marital separation came third.
It’s understandable. 45% of divorcees over 50 delayed their divorce for a long time, often citing their children as the primary reason.
One of the effects of this can be a tunnel vision approach to getting the divorce done and visualising a life free of their spouse and forgetting to think about how life post-divorce will look and how they will fund it.
Forgetting finances
According to research by Legal & General, just 12% of people who get divorced take financial advice and 17% do not discuss any aspects of their finances.
When couples over 50 divorce, more of them turn to family (24%) or friends (20%) instead of a financial adviser (12%).
Other findings include:
- 20% of couples talked about their pension, versus 58% who talked about the value of their joint home.
- 26% are financially worse off after their divorce.
- 21% say their retirement lifestyle has been negatively impacted because of their divorce.
So why is this?
The family home is an obvious shared asset. It’s easy to find out what it is worth and the equity that exists in it. It’s also a very emotional asset. The family might have lived there for some time, the children might have grown up there and friends and family are nearby, so the thought of leaving the family home or losing it to a spouse is extremely difficult.
A pension tends to be the preserve of the individual. Pension statements are not addressed jointly and in the interests of reaching the desired end state, couples can brush over it. The reality is that the average pension is over £100,000 for people in the UK aged 55-64, excluding the state pension. The average UK property was £285,000 in December 2023 and if you consider the costs of selling a property and repaying mortgages, there won’t be a huge amount between the two, so it doesn’t make sense for people to walk past a pension, especially as it can provide certainty of income in later life.
Of course, the other crucial element here is that the later a couple gets divorced, the less time they typically have to earn additional income and repair the financial damage incurred through divorce.
Women come off worse
In half of couples, 90% of the pension will be with one of the partners, and this is predominantly men. So, it’s more advantageous for women to make sure they bring pension wealth into consideration when speaking to a solicitor about divorce.
The numbers bear this out. On average, a woman now in her 50s in the UK will retire with approximately £39,654 of pension savings. By comparison, men of this age group will retire on average with the more comfortable sum of £84,205.
However, the way we speak about the consequences of not doing this is important. Debora Price, a Professor of social gerontology at the University of Manchester and specialist in the study of inequality in later life divorce, says research suggests that the way to engage women in this situation is to talk about a “just and fair settlement”, rather than scaring them with “you’ll be poor in later life” as they will shut down.
Making the case for advice
It’s easy for us to say that people need financial advice when approaching a divorce, but the research tells us that people don’t know this. Wren Sterling and other financial planning firms have a responsibility to get the message out there.
It’s certainly easier for us to help when someone is already engaged in financial planning, either directly or because their lawyer or accountant has suggested it. Those relying on friends and family could miss out and once the settlement is done, it’s much harder to ensure the best outcome.
Our role is important for several reasons. Firstly, we can provide peace of mind at an incredibly difficult time for everyone. Secondly, we can ensure that all assets are considered. Thirdly, we can plan for life as a divorcee using cashflow planning tools to give clients a visualisation of their lifestyle post-divorce.
The reality is that there is likely to be two costs for accommodation, bills, childcare support and lifestyle, whereas before there was only one. That’s why we see an average drop of 20% in monthly income post-divorce and a third of divorcees downsize every aspect of their lives. Financial planning is extremely valuable in this situation.
We see difficulty understanding pensions in all aspects of our work, so that doesn’t surprise us. However, it’s much easier to split than a property and crucially, it has the potential to provide certainty and flexibility in later life. When we get married, we earn income to pay for all sorts of joint expenses, so it’s illogical for personal pension provisions to sit outside this, but making the emotional and logical differentiation is understandably difficult for divorcees.
That’s not all. We can analyse all assets, debts, income and liabilities, including protected benefits in pensions to give clients an accurate indication of what they’re entitled to, as well as investing the proceeds of pension sharing orders.
Finally, we can understand why the idea of paying another professional some fees at an already very expensive time can be a blocker (the average cost of a divorce is £14,500) but the value of working with a financial planner, at the minimum to bring a spouse’s pension into play could be repaid several times over, especially when buying an annuity.