25 June 2020
- Pre-pandemic divorce valuations could have changed by 30%
- Brewin Dolphin says asset valuations and job security could affect those wanting to get divorced
- Brewin Dolphin research says cost of divorce putting people off
Pre-pandemic divorce valuations could have changed by as much as 30% says Brewin Dolphin, the wealth manager. This could lead to people receiving unfair settlements if valuations are not updated.
Valuations conducted for the family court in deciding financial settlements take into account pension valuations. Defined Contribution pension schemes have gone down broadly in line with the markets; they may be down by 15%1. Meanwhile, Defined Benefit (DB) pension schemes (also known as final salary schemes) have gone up in value as pension schemes now need to set aside more money to pay the same income because of lower investment returns2. This could mean a positive 15% swing for DB schemes. If a husband and wife had one of each type of pension this could result in a combined swing of 30%. This could lead to the divorce courts making what might be considered an unfair settlement.
According to the wealth manager, there has never been a more important time to take financial advice at the time of planning a divorce as economic uncertainty and market volatility is affecting valuations. Courts are currently focusing on care and child cases rather than financial remedy, so financial cases may not be heard at the usual rate until as late as spring 20213. This gives people who are planning to get divorced an opportunity to make sure all their pension and asset valuations are correct.
Matt Sullivan, head of professional services at Brewin Dolphin, says: “The current economic uncertainty will have an impact on the value of pensions, investments and other assets, including the matrimonial home. This, combined with questions around business viability and employment security, will affect people’s settlements. For example, the value of a Defined Contribution pension scheme might be 15% less than at the beginning of the year. Meanwhile, a Defined Benefit pension scheme could be worth as much as 15% more. This 30% swing could have a significant impact on a divorcee’s future finances. There has never been a more important time for people wanting to get divorced to take financial advice as soon as they can.”
Research from Brewin Dolphin4, which was conducted prior to the Covid-19 pandemic, revealed that nearly a quarter of those who are married have thought about getting a divorce. Whilst the confines of lockdown may have pushed some couples to think about whether they want to stay married, it is likely that those who wanted to get divorced beforehand will be thinking about taking legal advice.
Carla Morris, financial planner at Brewin Dolphin, says: “Our survey showed that there were a lot of people who were thinking of leaving their partners. Now that couples have been forced to spend months together in lockdown, with many having to cope with the stress of job uncertainty, working from home and trying to home-school, any underlying problems within existing relationships may be exacerbated.”
The survey revealed that 23% of those who are married have considered getting a divorce, with 12% considering a divorce within the previous six months. Of those who have considered a divorce, the main reason for doing so was because they had simply fallen out of love (30%). A further 25% of people surveyed claimed not to feel appreciated and 26% cited loss of physical contact or intimacy as a reason for wanting to leave their spouse. One in six (14%) of those questioned said their partner had been unfaithful.
Costs of divorce are putting people off
However, the survey showed that half of those who have thought about divorce didn’t think they could afford it (52%). Indeed, 39% of people who wanted to leave their spouse said they were worried they would not be able to afford a home on their own. The cost of legal fees is another big factor with 32% saying it is putting them off getting divorced and 27% said they were put off by having to live off a lower income. Of those who have considered a divorce, 23% said they were unsure how their pension would be divided if they were to leave their spouse and three in five (59%) said they have delayed getting a divorce as they don’t know how their investments and assets would be split.
Carla adds: “Our research shows that the costs associated with getting divorced are a concern for people, no matter how unhappy they are. The cost of legal fees, a fear of being unable to afford to live alone, or to live as a single parent, and the uncertainty caused by not knowing how the assets will be split are clearly playing a role. However, six months on and faced with the economic aftermath of the global pandemic, the financial position of couples will be even more uncertain.”
For this reason, Carla says it is important for anyone considering getting a divorce to take financial advice to make sure they understand exactly what their financial position is right from the outset.
Pension mistakes are common – pension splits can be unfair
The survey shows that would-be divorcees are right to be cautious with 24% of all people surveyed who have been divorced claiming they will have to retire later as a consequence of leaving their spouse. A third of respondents (36%) claimed to have lost a lot of money in their divorce.
Matt Sullivan says that there are many cases where people do lose out because they have not received the right financial advice, particularly with regard to dividing the pension during the financial remedy proceedings. Matt, who works closely with divorce solicitors, pensions expert witnesses and barristers in his role at Brewin Dolphin, explains that difficulties are likely to be more acute when there is a mixture of Defined Benefit and Defined Contribution pension schemes and complex uniformed services (police or armed forces) schemes, and where there is a need to find a fair financial settlement that involves offsetting pension assets with other kinds of assets.
He explains: “Solicitors regularly ask us for pensions advice because this concerns regulated advice and is not within the remit of most solicitors. Unknown complications can occur in a financial settlement when a wealth adviser or pensions expert is not consulted. The cash equivalent value (CEV) is not always an accurate basis from which to negotiate because it can overlook other important values hidden in the detail of the pension scheme rules, such as a guaranteed minimum pension.”
Matt added: “Statistically, if any party in a financial settlement is more likely to be unfairly treated, it is the wife5. For a number of reasons, including time spent being the homemaker, many women tend to invest less in pensions throughout their career and will receive a share of their husband’s pension to help create a fair settlement. In addition, women typically show a preference for keeping the matrimonial home and the solicitor may allow them to do this without the client taking proper financial advice to understand exactly what the long term ramifications are of balancing pension assets with property and other assets.”
Where financial advice is sought from wealth advisers, the Brewin Dolphin survey reveals that divorced men were more likely to have taken financial advice than women, with 62% of men having obtained financial advice at the time of their divorce compared to 52% of women. However, a third (34%) of people surveyed said they believed they took ‘financial’ advice from a lawyer and a further 16% said they took ‘financial’ advice from a friend.
Happy ever after?
The survey results show that the financial impact of a divorce seems substantial with the standard divorce costing over £22,000 when taking into account legal fees, the division of assets, child maintenance costs and other costs relating to divorce. According to divorcees, the most expensive single aspect relating to divorce is the division of assets with an average cost of just over £14,000.
However, showing that there is some truth in the old adage ‘every cloud has a silver lining’, the survey also revealed that, despite the financial burden a split can bring, 70% of divorcees say that being divorced has made them happier.
– Ends –
NOTES TO EDITORS
Defined Contribution schemes: YTD the FTSE 100 is down just over 17% as shown the in the chart below. Over 1 year the FTSE100 sat at 7,242.44 and it is now at 6,292.60 which is a 15.2% drop.
Defined Benefit schemes: “Given the reductions in gilt yields in the past few months it is entirely reasonable to expect transfer values of private sector DB schemes to be about to increase by perhaps as much as 15%, all other things being equal,” say Jonathan Galbraith and Chris Goodwin (both Fellows of the Institute of Actuaries and Senior Actuaries at Mathieson Consulting Ltd, experts on Pensions and Divorce). Mathieson Consulting Ltd is part of the Brewin Dolphin group.
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PRESS INFORMATION
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About Brewin Dolphin
Brewin Dolphin is a UK FTSE 250 provider of discretionary wealth management. With £41.4* billion in total funds, it offers award-winning personalised wealth management services that meet the varied needs of our clients including individuals, charities and corporates.
We give clients security and wellbeing by helping them to protect and grow their wealth, in order to enrich their lives by achieving their goals and aspirations. Our services range from bespoke, discretionary investment management to retirement planning and tax-efficient investing. Our focus on discretionary investment management has led to significant growth in client funds and we now manage £35.7* billion on a discretionary basis.
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*as at 31st March 2020
1 See Defined Contribution scheme graph in Notes to Editors.
2 See Defined Benefit comments in Notes to Editors.
3 Sir Andrew McFarlane, President of the Family Division, said the need for stringent social distancing is likely to remain for many months ahead. The Family Court and Covid-19: The Road Ahead. 9 June 2020.
4 Survey carried out for Brewin Dolphin by Opinium. 2,000 adults, 21/01/2020 to 23/01/2020.
5 The Pensions Advisory Group intimated on this fact in its report published in July 2019: A guide to the treatment of pensions on divorce.