“Fine, you keep the house and I’ll keep my pension.” It sounds like a fair swap. It is also one of the most common ways a divorcing person gives away value without noticing. This month I want to explain why and what you should consider before you agree to anything.
Start with what is in the pot
Broadly, the marital pot means the assets built up during the marriage. It becomes more complicated when for example assets were acquired before the marriage, have been used in different ways during it, or came in by inheritance. The couple’s wider circumstances matter too.
In a previous article I described the Form E, which each party completes with details of their worldwide assets and liabilities. That is how the pot gets established. Dividing it is the harder part.
50/50 may be the starting point but is it the answer?
The answer is rarely as simple as adding everything up and splitting it down the middle. In England and Wales, the court’s first consideration is the welfare of any child of the family under 18.
After that there a range of factors are to be taken into account such as the age of the parties, income, earning capacity, resources, the standard of living enjoyed during the marriage and importantly each party’s needs.
For some couples, an equal division makes sense. For others, one person’s needs will decide the outcome because, for example, they have a lower earning capacity, are caring for the children, or need more for housing.
The house versus the pension
This is where couples most often lose sight of the whole picture, and it is easy to see why.
One person says: “I want to keep the house.” The other replies: “Fine, you keep the house and I’ll keep my pension.” Houses and pensions are different kinds of asset. A house gives you somewhere to live and represents a substantial amount of capital. A pension is designed to provide an income in later life, and the tax and access rules around it, mean its value can be quite different from an equivalent amount of equity in a property.
So, a £300,000 pension is not necessarily worth the same as £300,000 of equity in the family home.
That does not make the swap wrong. Sometimes it is the most practical answer. However, it does mean that such a swap needs to be looked at as part of the overall settlement rather than agreed in isolation.
Where a pension is significant, it is normally necessary to obtain an actuarial report before trying to reach any agreement.
This is because the value shown on the pension statement can understate or overstate, what the pension is worth to each party. If pensions are part of your picture, my newsletter last year on the subject is worth revisiting.
Where the value leaks away
The biggest financial mistakes are rarely dramatic. They happen in the small compromises made during negotiations.
Someone takes slightly less because they want to keep the house. Someone else just wants the divorce finished and agrees terms without stepping back to ask: “What am I giving up, and what am I getting in return?”
None of this means that every settlement should be fought to the last pound. Quite the opposite. A good divorce is one where you understand the value of what you are agreeing, have considered the alternatives, and can see why the overall outcome works for you and your children.
One more thing, and it is not about money
Do not leave the Christmas arrangements for the children until December. It is easy to think: “We’ll agree the finances and sort Christmas out nearer the time.” By then emotions are running high, travel has been booked, grandparents have made plans, and each parent has a different idea of where the children should be and when.
Christmas has a habit of turning unresolved parenting questions into major disputes. The earlier you deal with both the finances and the arrangements for the children, the more options you have, and the less likely you are to end up paying lawyers to resolve problems that could have been avoided.
The question to ask
If you are going through a divorce, do not just ask “What am I entitled to?” Ask “What am I agreeing to, what am I giving up, and have I understood the value of both?”
If you would like to talk any of this through, you can book a free, no-obligation conversation with me. If you know somebody weighing up their options, please share this post with them.
