Family lawyers are all too aware that reaching a financial settlement on divorce can be one of the most difficult parts of their client’s separation. Although there are statutory factors that we can point to which provide guidance for dividing up assets and income on divorce, the courts also have a wide discretion. While this means that the Family courts can be quite creative in the way they structure financial awards to meet the parties’ particular circumstances, it also means that there are no absolute rules to dictate who should get what in each circumstance. This can be a difficult point for clients to appreciate when, understandably, they want clarity and certainty as to what sort of financial position they are going to be left in when the dust has settled, and they start their new normal.
Most spouses who separate, save for those who enjoy significant wealth, will have to go through a period of financial adjustment post-divorce, and it is therefore essential that family lawyers give them a realistic understanding of what their post-divorce future might look like at the outset of the process. With that in mind, we have set out below some of the most common points that come up with our clients during our discussions with them about their post-divorce future and where we often have to reality check their expectations:
- Remember to factor in the difference between gross, net, and disposable income. While many people will find it tempting to quote income in terms of the larger gross figures, this can be misleading. Rather, income should be looked at as the net figure once tax, pension contributions and any other deductions have been made. You should also remind clients that the net figure on a payslip is then going to be reduced further by rent/mortgage payments, council tax, utility bills etc, meaning that what is actually disposable income is significantly less.
- Where there is a discretionary bonus in play, the key word to remember is discretionary. It is helpful in these cases to encourage clients to see base salary and bonus income as separate, rather than conflating the two.
- What is your client’s income capacity and are they maximising it? It is important to explain to clients that the days of long-term spousal maintenance orders are, for the most part, a thing of the past and that spouses are expected to try to work towards financial independence so that there can be a clean break between them.
- Housing: there is one financial pot – how far can it be stretched and how far does your client need to compromise? The former matrimonial home is likely to be the most valuable asset available to the parties, and the net equity in it will need to rehouse both post-divorce. This is likely to mean, especially if your client is located in London or the South East where property prices are higher, that they need to downsize, relocate, or compromise on factors like a garden, off-street parking or living space.
- Pensions: has your client given real thought to their retirement? Research has shown that women are disproportionately affected by pension poverty. While it is tempting for clients to prioritise their immediate future when thinking about a financial settlement, remind them to consider how they will support themselves in retirement.
It is important for our clients to understand their financial needs and means more generally, and not just on divorce. With the cost of living crisis upon us, there has never been a more prudent time for everybody to get to grips with their finances.
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