When people think about divorce, they often focus first on the legal process and the division of assets. Who gets what? What would a fair settlement look like?
Those questions are important, but many of the difficulties we see are financial rather than legal. People can understandably become focused on immediate housing or how much cash they will receive, while pensions, future living costs and longer-term income receive less attention.
Divorce can require major decisions about your home, retirement and finances at a time when there is already a great deal to deal with. Once a settlement has been finalised and implemented, your options may also become much more limited.
This is why financial planning during divorce should look beyond the immediate negotiations and consider what a proposed settlement could mean for your life in the years ahead.
There are several mistakes we see regularly when people are negotiating a financial settlement.
Mistake 1: Focusing only on today
This is one of the most common issues we encounter.
Immediate concerns naturally take priority:
- Where will I live?
- How much money will I have available?
- What will my finances look like over the next few months?
But the effect of a divorce settlement can extend well beyond the first year or two.
We often encourage clients to think about how they would like their life to look in 10, 20 or even 30 years. Understandably, many have spent far more time thinking about the immediate problems they need to solve.
A settlement that works today still needs to support future spending, housing and retirement. Looking carefully at your financial needs after divorce can therefore change how you assess the options available during negotiations.
Mistake 2: Underestimating the importance of pensions
Pensions are sometimes treated as less important than property, cash or investments because they do not feel as immediate.
This can be particularly relevant when somebody is considering whether to retain more of the family home in exchange for receiving a smaller pension share. A house is tangible and provides somewhere to live, whereas pension benefits may seem a long way off.
For people approaching retirement, however, pensions can be among the largest assets involved in the settlement and may be important in providing future income.
We frequently find that people focus on the value of a pension rather than what it could provide during retirement. Those are different considerations.
Good pension planning for divorce looks at the type of pension, the benefits available and how different settlement options could affect future retirement income.
Mistake 3: Underestimating future living costs
Most of us have a reasonable idea of our regular monthly spending. What is often harder to estimate is how those costs may change after divorce.
Expenses that were previously shared may have to be met from one income. Housing arrangements can change, and there are also costs that do not appear every month but still need to be planned for.
Property maintenance, replacing a car, holidays and home improvements are good examples. You may also want to continue helping children or other family members, while unexpected expenses will inevitably arise from time to time.
A realistic post-divorce budget needs to take account of these less regular costs as well as everyday household spending. Otherwise, it is easy to underestimate the level of income or accessible savings you may need.
Mistake 4: Making an emotional decision about the family home
It is entirely understandable that the family home can become such an important part of divorce negotiations.
It may provide familiarity at a difficult time and, where children are involved, remaining there can reduce some of the disruption caused by separation.
The difficulty comes when the desire to retain the property is considered separately from its longer-term affordability.
We have worked with clients who kept the family home and were very comfortable with that decision. Others have discovered that mortgage payments, maintenance and other property costs placed more pressure on their finances than they had anticipated.
Rather than concentrating solely on how to keep the property, it is useful to understand whether you can realistically afford the family home after divorce and what retaining it would mean for the other assets available to you.
Mistake 5: Assuming cash will last
Cash can feel reassuring because it is accessible and easy to understand.
Someone receiving £250,000 as part of a settlement may initially feel that they have a substantial financial buffer. However, if £15,000 to £20,000 needs to be withdrawn each year to supplement income, the amount available can reduce considerably over time. Inflation may place further pressure on future spending.
For somebody in their late 50s or early 60s, that money may need to contribute towards their lifestyle for decades.
It is therefore useful to look beyond the amount of cash you will receive and consider how long it may need to last, alongside the other assets within your divorce financial settlement.
A case study: a settlement that looked attractive on paper
Andrew* was 61 and approaching retirement. His main priority during negotiations was to maximise the cash he would receive from the settlement because he felt this would give him flexibility and financial security.
The proposed settlement gave him a substantial cash sum and some investments, but a smaller share of the pension benefits.
Initially, Andrew was comfortable with that arrangement.
When the longer-term effect was modelled, however, the projections showed that the cash was likely to reduce steadily as he moved through retirement. At the same time, his smaller pension share meant there was less retirement income available later.
Because this was identified before the settlement was finalised, Andrew was able to consider alternative options and understand how a different balance of assets could affect his future finances.
The exercise showed why an attractive headline figure does not always tell you enough about how a settlement might work over time.
Why are these mistakes so common?
None of these decisions are straightforward.
During divorce, it is natural to pay more attention to the assets and concerns that feel most immediate. A house can feel more relevant than a pension that will not be accessed for years, while a large cash sum can appear reassuring when there is uncertainty about future income.
The problem is that some financial consequences may only become apparent much later.
Looking at the figures objectively can help you understand those consequences before decisions are finalised.
How can cashflow modelling help with a divorce settlement?
Cashflow modelling allows different settlement options to be compared to see how they may affect your finances over time.
Rather than looking only at current asset values, we can consider future income and expenditure, retirement plans and housing costs. We can also look at how long savings or investments may last under different assumptions.
We often find that this changes how clients view a proposed settlement; a decision that initially appears attractive may look different when projected over 20 or 30 years.
The purpose is not to produce a perfect prediction of the future. It is to provide a more informed basis for comparing the choices available today.
Final Thoughts
Negotiating a divorce financial settlement involves much more than agreeing how assets should be divided. You also need to understand how those assets could support your future spending, housing and retirement plans.
Financial planning and cashflow modelling can help you compare different settlement options and identify possible financial pressures before an agreement is finalised.
Contact us to arrange a confidential conversation.
