Progeny Wealth's guide to couples’ finances.
It can be tempting, when considering the question of equality between the sexes, to assume that here in the UK most of the major battles have been fought and won. Few people would openly question the principle that men and women doing the same job should be paid an equal amount of money, for example, or that women should have as ready access to financial products and services as their male counterparts. Although these assumptions are widely accepted, it doesn’t mean that the situation as experienced at ground level, so to speak, always matches the lofty ideals. According to the Office for National Statistics, for example, there is a gap of 14.2% between the average pay of men in full-time employment and women working the same hours. A striking illustration of this disparity is offered by the symbolic presence of Equal Pay Day which, this year, fell on November 9th. This marks the day of the year after which the average woman, thanks to this shortfall in wages, is effectively working for free. It is also worth bearing in mind the fact that it was only as relatively recently as the 1970’s and the advent of the 1975 Sex Discrimination Act, that women were routinely able to open their own bank accounts or borrow money on their own behalf, without the permission of a man such as their husband or father. The rights and wrongs of this situation, and the degree to which the ongoing shortfall in female earning power is as much as social issue as it is an economic matter, can be discussed and analysed elsewhere. What it serves to illustrate, however, is the fact that the attitude which many couples take towards their joint finances is as much a matter of deeply ingrained habit and societal mores as it is a practical and logical response to the reality of the situation.
Few couples, in the midst of coping with the realities of working and family life, take a genuinely joint and shared approach to their finances. In most cases one partner is generally the person responsible for making the majority of financial decisions or (and this can be just as important), handling the practicalities of actually acting upon these decisions. The decision to borrow against a mortgage, for example, may well be taken jointly, but the vital responsibility of ensuring that the monthly repayments are maintained may rest with just one half of the couple. In the case of some couples, it will be the woman who shoulders this burden, but in a large percentage of family units it is still, in what might be regarded as a lingering echo of the way things used to be, the man who deals with the finances. As long as things are going well this might seem like a perfectly workable solution, but problems tend to arise in the event of a separation or divorce, with the partner who didn’t handle the finances suddenly finding themselves struggling through a maze of questions, issues and problems as they attempt to get to grips with the true state of their finances. Whilst many people feel an understandable aversion to considering the thought that their relationship might one day break down, it makes sense for both partners to be open and honest and to be able to sit down and draw up a detailed and clear account of exactly what condition their finances are in. Even if a couple remain happily entwined for years and decades to come, this knowledge will be invaluable when planning financial undertakings such as loans, investments or savings.
One extremely useful course of action is to obtain an annual credit report and ensure that you have read and understood it fully. In the event of a split this will be a vital aid to understanding precisely which of the debts which you and your partner may have amassed are joint debts and which rest clearly in the name of one or other individual. All too often, in the event of a break up, the partner who didn’t deal with finances will find themselves confronted with debt which they were not aware of, or will be left in the position of finding access to credit difficult to obtain on the basis of their ex-partners behaviour. It’s useful to note, for example, that if you register your spouse to a credit card which was taken out in your name, you will still be solely liable for any of the debts which they run up on this card, as there is no such thing as a joint credit card. Whilst considering credit cards it is worth pointing out that having your own separate credit card, or some other form of personal and distinct funding, is something which will offer a temporary safety net and source of liquidity in the event of a split, allowing you to support yourself during a period in which join assets or monies may well be the subject of some dispute.
In the case of the majority of couples, the two most valuable assets to be dealt with will be the family home and any pension funds. For many couples, reflecting the ongoing earning disparity outlined earlier and the fact that women are still more likely than men to find their career progression disrupted by the demands of child care, the male partner is likely to have more valuable pension assets than their spouse. Again, the topic of pensions is one which people have an inclination to put-off considering for as long as possible, doubtless due to a combination of a natural fear of ageing and mortality and the somewhat dry and complex nature of the issue itself. It can be just as valuable, when deciding how to divide assets in the event of a split, to have a firm grasp of your partner’s pension as it is to fully grasp the complexities of your own. In many cases, for example, pension assets will actually be considerably more valuable than the family residence, particularly if the property still has a percentage of the mortgage outstanding.
Despite this, many women have a natural inclination to want to remain in the property, often with a view to maintaining stability for any children involved, and this leads to them making a hasty decision to keep the property in return for a reduced share of any pension assets. Making such a decision may be understandable in emotional terms, but a failure to fully interrogate the details of a spouse’s pension, which, particularly in the case of a Defined Benefit Pension Scheme will be both hugely complex and possibly valuable, could mean that this is an extremely costly step to take in the longer term. Once left alone to deal with the family home a single partner may struggle to maintain it financially and the reduction in their income may make re-mortgaging particularly difficult. In many cases, the more prudent course of action will involve purchasing a smaller and more affordable property and obtaining a larger share of any pension provision, offering stability both now and in the future. As is often the case with situations such as these, the key piece of advice is to ensure that you fully understand the terms and conditions of your mortgage and that the repayments are set at a level which you will be able to maintain. If you do opt to re-mortgage in order to raise funds then it might be valuable to enlist the help of a mortgage broker with the expertise and experience to help you find the best possible deals on offer to someone in the position of having recently become a newly-single parent.
The sheer complexity of many financial instruments and products, particularly those which the other partner in a relationship has always been in charge of handling, is such that the services of a qualified Independent Financial Advisor (IFA) will prove invaluable. In terms of Defined Benefit pensions, an IFA will have experience of handling Cash Equivalent Transfer Values (CETVs) and will be able to spot and advise on any features or guarantees specific to a scheme. They will also be able to model and forecast the value of the assets over the longer term and provide you with the information needed to challenge any unfair valuations presented by the other party. As with the other issues dealt with here, this is something which has to be handled in a calm and measured manner, and the advice of professionals will bring the desired level of reason and practicality to what is an understandably fraught and emotional process.
A similar level of advice should be sought when dealing with any joint life protection policies. The simple fact of splitting from a partner will mean that your needs have changed and thus any policy should be reviewed in light of this change. Most providers will allow polices to be re-assigned, and an IFA will be able to provide reassurance around the topic of any tax implications. Most pure protection contracts shouldn’t impact upon your position vis-à-vis taxes, but accessing a professional analysis will always be the most prudent course of action. This is especially the case when assigning any investment products to be divided, since these may well incur a level of Income Tax or Capital Gains Tax. An IFA will be able to plan the distribution of an estate in a manner which maximises income, ensures fairness and minimises any tax implications.
The last but by no means least important of the issues to consider is any Will you may have written, which make all gifts to the former spouse void in the event of a divorce and will be automatically revoked in most cases in the event of subsequent re-marriage. Estate planning is vitally important, since a carefully considered Will means that your estate is distributed in line with your wishes in the event of your death. You may wish for your assets to be placed in trust on your death for your children. The age that children can benefit from the trust assets could be set at an age beyond 18. For example, it is common practice to set the age to 21, 25 or beyond, ensuring assets remain in trust so that children do not inherit a sum of money at age 18. It is important that a person writing a Will considers the level of control they want over the assets beyond the grave and how they would like these assets to support the family.
In simple terms, the breakdown of a relationship will almost always be an upsetting and emotional event. By adopting a degree of foresight, accessing the relevant information and seeking expert advice, it should be possible to limit the impact going forward, and ensure that any emotional blow isn’t accompanied by an equally disruptive financial shock.