Perspective

Divorce law change 2021: less blame, less pain


Divorce law in the UK is undergoing one of its biggest changes in decades.

New legislation, expected to come into force later in 2021, will alter a key plank of the current divorce process by removing the need to attribute blame. The aim? To limit as much as possible any unnecessary acrimony in what is often, in any case, a painful process.

As the law currently stands in England and Wales, one party must place blame on the other party if they seek an immediate divorce. A single overall ground for divorce is the “irretrievable breakdown” of the marriage, where the “petitioner” points to one of five factors (such as adultery or unreasonable behaviour) to prove the irretrievable breakdown.

The Divorce, Dissolution and Separation Bill – commonly referred to as the “no-fault” divorce bill – seeks to change what qualifies as irretrievable breakdown, and remove this need to place blame on one party.

Divorce after the “no fault” bill – and the need to plan

The divorce itself – and how it is justified – is often not material to the financial settlement and the financial planning that should sit alongside. In fact, the removal of the need to lay blame and highlight parties’ past behaviour could be helpful in focusing more clearly on the financial matters at hand.

So while this is one of the biggest shake-ups in divorce law in the last 50 years, we see it as underscoring the need for parties to access financial advice as early as possible, perhaps even before proceedings are underway. Financial settlements can be difficult to navigate and it is essential to understand from the outset of negotiations how a settlement can be used in the most effective way, to meet the needs of your future life.

The early stages of divorce

In many cases, one spouse will usually have a higher earnings capacity than the other, and perhaps a better knowledge and understanding of their personal finances.

The court will apportion assets based upon the core principles of need and sharing (with need taking precedence over sharing). Ultimately, the more an individual knows about their finances, the more confidence they have during divorce discussions and in turn, the more power they have to negotiate during the process.

Conversations will probably be led by a family solicitor, but having a wealth planner involved can be beneficial.

Individuals are likely to be facing a situation that they have never been in before and a good planner will have the experience to guide individuals through this difficult period. As well as being a life-changing event, it can be an opportunity to start afresh; review current positions, set new financial goals and plan for the future.

It is imperative that pension benefits are not overlooked when considering the division of assets. Although it can be tempting to negotiate away a share of the spouse‘s pension in favour of a greater share of another asset (which may bring immediate benefit), pension rights can be extremely valuable, particularly over the longer term. Planners can advise on the receipt of pension benefits and an appropriate investment strategy.

After the divorce

The period following a divorce, when the settlement is agreed and implemented, can be an overwhelming and emotional time. The financial goals that you may have originally set as a couple are likely to have changed. They may be completely unrecognisable.

Individuals should consider drawing up new goals which could relate, for example, to milestones such as clearing the mortgage or raising capital to fund children’s education or property purchase.

A planner will return to these goals regularly with clients to ensure that the advice remains relevant. Your planner is likely to use some form of cashflow planning, setting out a “road map” for you to visualise these objectives and the level of risk you might need to take to achieve them. The plan can be adjusted at any time.

In appointing a discretionary wealth manager, you delegate the responsibility of managing your investments to an investment professional. They will invest on your behalf, but also help to maintain records of your finances and deal with the administration associated with investing, such as making your annual ISA subscriptions, pension contributions and ensuring other tax efficiencies are achieved where possible.

In real life: working with a woman in her 50s before and after her divorce

The case study below provides an example of how Cazenove Capital recently assisted a client.

Background

Our client, in her early 50s, was introduced to us by her divorce lawyer following their initial meeting, during which she disclosed her intention to commence divorce proceedings against her husband.

Her husband had enjoyed a successful career in advertising. Our client had spent the last 17 years raising their two children and looking after the family home.

At the conclusion of the divorce and financial remedy proceedings, our client was awarded a cash settlement of £3,000,000. Apart from her property in west London (with a value of £1,750,000 and no mortgage), from which she did not wish to downsize, this lump sum was her only liquid asset. She was unclear how to put the lump sum to work to provide her with an income for life. She was required to pay for the last couple of years of their daughter’s private school fees from the settlement.

Key need

Our client’s primary objective was to generate enough income to meet her essential and discretionary expenditure for the rest of her life. She required an income of £80,000 per annum (net of tax).

Our solution

Following a detailed fact-gathering meeting we completed a detailed analysis of our client‘s position. Cashflow modelling – which is a key aspect of our planning work – allowed our client to visualise her income requirements in the coming years. The cashflow modelling highlights the client’s capacity to absorb losses and withstand short-term market volatility, as well as estimating the net investment growth required to meet her goals.

We also advised our client on a suitable investment strategy, taking into consideration her own personal feelings towards investment risk and her overall “capacity for loss”.

The key elements of the plan we implemented for her included:

  • Retain between one and two years’ expenditure in cash (including the known amount of short-term liabilities for her daughter’s school fees).
  • Invest £1,500,000 into an offshore investment bond (to allow her to make tax-deferred withdrawals), whilst benefiting from “gross roll-up” of any income and gains within the bond.
  • Add £1,000,000 to a taxable investment portfolio and make annual ISA subscriptions from this sum. The taxable investment portfolio will also allow us to utilise her annual capital gains tax allowance.

This strategy allows us to invest using the client’s tax-efficient allowances, as well as taking into consideration her short, medium and long term goals.

 

Statements concerning taxation are based on our understanding of the taxation law in force at the time of publication. The levels and bases of, and reliefs from, taxation may change. You should obtain professional advice on taxation where appropriate before proceeding with any investment.

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.