The rising cost of living is bringing with it unprecedented levels of financial uncertainty but what does this mean for your financial settlement?
Soaring energy bills, increasing interest rates and the rising cost of food and fuel is having a profound impact on people across the country. For some couples, the pressures brought on by the pandemic and now, the recession, has brought new challenges to relationships that have proved impossible to overcome.
If you and your married partner have decided to part ways, the prospect of divorce might feel more uncertain than ever, with many wondering how the current crisis will impact a financial agreement being made.
What is a financial settlement?
Otherwise known as a financial agreement, a financial settlement is when a divorcing couple agrees on the value of their assets and how they will be divided. It includes everything from investments and shares to mortgages, debts and pensions.
Following the financial crash in 2008, case law decided that financial agreements already approved could not be reopened due to the economic crisis. An agreement would only be reopened if the settlement hadn’t already been implemented and clearly resulted in an unfair outcome for one individual. As a result, it is important to consider the division of assets carefully to prevent one person ending up worse off in the future.
Whilst putting proceedings on hold until the current crisis has eased may seem tempting, there is no way of knowing how long the financial market will take to recover and any potential risks may outweigh the perceived benefits.
Here, we explain what the economic uncertainty means for financial settlements and how you can effectively prepare.
1. Asset Valuation
When it comes to the valuation of assets including cars, antiques and furniture, it might be worth getting items valued regularly to make sure the settlement accurately reflects the state of the current financial market. Likewise, couples who have overseas investments or property abroad should consider the value of the pound when coming to a financial agreement.
In all aspects, it is recommended to consider whether a decrease in value is likely to future-proof yourself as much as possible. For example, if one party keeps property whilst the other walks away with cash, the value could become imbalanced over time.
If valuations have already been prepared as a result of negotiations and financial proceedings, asking for these to be updated in line with current market conditions is wise in case of any significant changes.
2. Business Valuation
The valuation of a business can often cause tension whilst divorce proceedings are ongoing, with both parties having different opinions as to how much it might be worth. These valuations become even more complicated in an economy where reliance on previous performance or accounts from a previous year may not be a reliable indicator due to tax and market conditions.
Now more then ever, it is critical to have an independent valuation by an accountant to get an honest financial picture of the business, its assets and its future to ensure a fair settlement is reached whilst still preserving the business.
3. Housing & Mortgages
For most separating couples, the family home will be one of their biggest concerns, especially when considering the current increase in mortgage rates. The ability to buy a property must be weighed against the family’s needs at a time of financial uncertainty when the availability of suitable homes may add further complications.
If you’re thinking about remortgaging to reach a financial settlement, it is worth considering how the rising interest rates, increased house prices and thus, equity will affect you. On the other hand, if you agree to pay your ex-partner based on the value of the family home, making an agreement based on a percentage of the value rather than a fixed lump sum may be critical in ensuring a fair agreement in the long term.
4. Spousal & Child Maintenance
The issue of maintenance becomes increasingly complicated in times of financial uncertainty. Whilst spousal and child maintenance orders are subject to amendment if there is a significant change in circumstances, the stress and cost this might incur means it is important to get it right first time.
Make sure your budgets are up to date to ensure any agreement meets your financial needs now and in the future and, if possible, agree that any maintenance is issued on a flexible basis so that it adjusts annually in line with inflation, accounting for an increase over time.
Likewise, if you are already receiving maintenance, be sure to revisit the order if the payer has had a significant salary increase or you can no longer meet your own needs or your children’s needs.
5. Pension Sharing
The value and division of pensions is often a sensitive subject when coming to a financial agreement as the court will look at sharing the entire pension rather than the value of the pension accrued during the marriage.
Much like tangible assets, the value of a pension might need to be revisited to reflect the current market value, especially for couples who are of retirement age. This is because current changes in interest rates may impact the Cash Equivalent Value (CEV) of pensions, including those where sharing orders have been calculated but not yet implemented, meaning the recipient might end up with a lower pension credit than they are entitled to.
Separating couples should look to get their pensions revalued and, for those agreeing to offset the value of their pension against cash or property, recognise that there is an increased risk that the CEV may not be an accurate representation value of the assets in the future.
Preparing for divorce
Proceeding with a divorce is a pivotal time for your future and finances. Whatever your financial circumstances, we recommend seeking advice during divorce proceedings. Book a free consultation with Beyond Legal by calling our Newton Abbot office on 01626 333380 or our Tiverton branch on 01884 212400.