Millions of people who are separated or divorced struggle to disentangle themselves from their ex-partner’s finances. From pensions and insurance policies to joint debts, many financial arrangements will need to be reviewed as soon as possible.
Beccy Boden-Wilks, of National Debtline, the debt charity, says: “Going through a break-up is always a painful time, but it is absolutely vital that you sit down with your ex-partner to sort out your finances, otherwise the situation could get a lot worse. You could find yourself liable for your ex’s debts, or in the future your ex could receive payouts from your pension or insurance policies.”
Here we give a brief guide to financial separation.
Joint debts and liabilities
In the current economic climate, the priority for many couples will be sorting out debts and other joint liabilities, such as household bills.
Many people do not realise that with joint loans, overdrafts or credit cards, both parties are liable for the full amount. This is known as “joint and several liability”. It means that if, for example, you have a £10,000 loan with your ex-partner, you will not owe £5,000 each — you will both owe the full amount.
Ms Boden-Wilks says: “This can cause problems if your ex becomes unable or unwilling to keep up repayments, or if they take out further credit in your name, because the lender will pursue you for payments. If you can afford to pay back the full amount, you will have to do so — if you cannot, you will have to negotiate a repayment plan with your creditor. Debt charities can help with this.
“If you are worried about your ex continuing to take out credit in your name while you are paying off the debt, contact your lender immediately and see if you can close the account.”
Joint and several liability can also apply to rent or mortgage arrears, as well as council tax, utility and other household bills. It is, therefore, important to ensure that your name is removed from all bills before moving out of the property.
An old partner’s finances may also have an impact on your credit rating. If a couple share any form of joint bank account or credit, such as a loan, this “financial connection” will appear on both party’s credit ratings.
Ms Boden-Wilks says: “If your partner or ex-partner has a bad credit rating and you have a financial connection with them, this will have an adverse effect on your rating as well. This is why it is very important to keep your finances totally separate for at least six years from when your partner had debt problems — since it takes that long for their record to become clean again.”
Once you have severed all financial connections from your partner, you can write to a credit-reference agency — Experian, Call Credit or Equifax — to “dissociate” yourself from your ex. The agency will share this disassociation with the others, so only one needs to be contacted.
For free and independent advice on dealing with debt and your ex-partner, contact a debt charity such as National Debtline, Citizens Advice or the Consumer Credit Counselling Service.
Also remember that your ex-partner will have access to any savings and current accounts in joint names. So it is vital to ensure these assets are divided fairly at the outset of a separation.
Mortgage or tenancy agreement
Sorting out living arrangements after a separation will depend on many factors, including whether the accommodation is bought or rented, if the couple is married and if there are any children involved.
Both parties have equal rights to the marital home — regardless of whether the tenancy agreement or mortgage is in one person’s name only — and this is likely to be a significant focus of a divorce settlement. But the situation for unmarried couples can be more complicated.
Moira Haynes, of Citizens Advice, says: “If you are the unmarried partner of a tenant you have no rights to stay in the accommodation. If you are joint tenants and you decide to move out, make sure the landlord transfers the tenancy solely into the name of the partner who is staying.”
If a couple lives together in a property owned by one person, it is usually assumed that the other partner has no right to stay. However, if the partner can demonstrate that they have a “beneficial interest” in the property, they may be able to stay or receive a payout when the property is sold.
Ms Boden-Wilks says: “A common arrangement is for one partner to pay for the mortgage in their name and for the other partner to pay for food, bills and other household expenses. If this arrangement has lasted several years or more, the partner without the mortgage can ask a court to recognise formally contributions that they have made towards the home.”
If you want to claim beneficial interest in your home or apply for an occupation order, you will need to get legal advice. Contact your local Citizens Advice Bureau for more information.
Pensions and life insurance
Those who separate at a relatively young age often forget that their ex-partner may be named as a beneficiary in their pension arrangements. If this remains unchanged, it means that he or she could end up receiving substantial benefits in 20 or 30 years’ time, or even sooner if you die prematurely.
Most pension schemes allow the nomination of a beneficiary to receive benefits if the member dies before retirement. With a money-purchase pension, the value of the member’s contributions, plus tax relief, will be paid to the beneficiary. If no beneficiary is named, benefits will usually be given to the member’s spouse.
Final-salary pensions — mainly in the public sector — may have more generous death benefits. The Teachers’ Pension Scheme, for example, provides a lump-sum payment of three times the deceased’s average salary, as well as a small pension, to a nominated beneficiary if the teacher dies before retirement. Malcolm McLean, of the Pensions Advisory Service, says: “It is vital that pension arrangements are reviewed after a separation or divorce. The nominated beneficiary should be kept updated to reflect your wishes — if not, your ex could receive thousands of pounds after your death, leaving a new partner with nothing.
“Also, remember that if no person is nominated, subject to the scheme's rules, the money may go directly to your spouse even if you are separated or divorced.”
For older couples, pension benefits are likely to be a crucial part of the divorce settlement. A common arrangement is for one partner to keep the pension benefits and the other to keep an asset of similar value, usually the marital home.
However, pension benefits can be split between the scheme member and his or her ex-spouse. Previously, the ex-spouse could not draw benefits until the age of 60, and the pension had to be taken wholly as income. But new rules from last month mean that an ex-spouse can draw these benefits from age 50, and as a 25 per cent tax-free lump sum.
If a retired couple separates, pension benefits can be more difficult. Those who invested in a moneypurchase scheme and bought a joint annuity — whereby your named partner will receive an income for life after your death — will find it near-impossible to separate their pension arrangements.
Laith Khalaf, of Hargreaves Lansdown, the independent financial adviser, says: “When a joint annuity is bought, the policy works on a named basis because the payout will depend on the exact age and circumstances of your partner. You, therefore, cannot usually transfer the pension to your new partner or stop benefits to your ex-partner.”
As with pensions, it is vital that life insurance policies are kept updated according to your circumstances.
Matt Morris, of LifeSearch, the insurance broker, says: “If a couple becomes separated or divorced, this will have no bearing on insurance policies as the policy will still pay out to the named beneficiary.
“If you have a single policy, remember to contact your insurer to change the name of your beneficiary. If you have a joint policy, this should be cancelled and replaced with a new single policy.”
Keeping down the costs of separation
Many couples, whether married or unmarried, will be able to separate amicably and reach an agreement on the division of assets without court intervention.
More Than Legal Services, which is a £20 add-on to home insurance, has seen the number of divorce petitions used on its website double over the past year.
Lana Clements, of More Than, says: “People are looking to save hundreds of pounds in legal fees with a ‘DIY divorce’. We provide many legal documents online relating to divorce, including a divorce petition and decree nisi. The customer can fill them out and the documents will be checked by a qualified professional.”
However, if you do opt for a DIY divorce, experts say that it is still important to get a court order to ratify the full and final settlement. David Lister, a family lawyer at Mishcon de Reya, the law firm, says: “A court order provides the finality that people need after a divorce or separation. It will provide peace of mind that your ex-partner will not come knocking on your door in 10 or 20 years’ time demanding a larger share of assets.
“The document, which will outline the division of capital and property, should be drafted by your solicitor and passed by a judge. Do not be fooled into thinking that prior to the divorce settlement you can ringfence your own money by placing it in a separate account.”
If you made a prenuptial agreement, this may also help when it comes to the division of assets.
Helen Cankett, of Rickerbys, the law firm, says: “Whilst prenups are not legally binding, courts may take them into account. If you have sizeable assets it is worth drawing up an agreement before marriage as it could be a useful safeguard. The couple will each need to see a separate lawyer at least 21 days before the marriage. The agreement will be drawn up by one lawyer and checked by the other.”
