3 financial aspects of divorce that could affect employees – and how to help them
In our series of blogs focussing on financial planning we will be looking at topics such as what you need to think about when someone dies and elder care financial planning. The first blog, below, looks at divorce and financial planning.
If your company is growing in scale, it is likely that you will encounter employees experiencing difficult personal issues from time to time.
Indeed, one of the most challenging emotional and financial hurdles your employees might encounter is divorce. According to FTAdviser, divorce rates surged in 2022, with Q2 seeing a 22% uptick in divorce applications compared to the previous year.
Some contributing factors to an increasing divorce rate could include:
- The introduction of the “no fault divorce” bill in 2022, which means couples can now separate without blame on either side
- The domestic strains of the Covid-19 pandemic
- The cost of living crisis.
As an HR representative, business owner or manager, it is important to be ready to help employees who are going through divorce. There are some key financial aspects of divorce that could concern them – so offering guidance as an employer can be incredibly constructive.
Here are three aspects of a financial plan that will be affected by divorce, and how you can work with your employees to help them cope.
- Wills and other estate plans
Usually, an individual’s estate will be passed to a spouse if they die. If an employee is getting divorced, it is crucial that they change their will, in order to name new beneficiaries of their property, shares, and other assets.
They may also need to amend their pension “expression of wish” forms to nominate new beneficiaries for pension assets.
Doing so can help keep their affairs in order if they were to pass away unexpectedly, and could avoid a difficult family dispute after their death.
Similarly, if your colleague has a financial Lasting Power of Attorney (LPA) document, which names an attorney who can make decisions if the individual becomes incapacitated, this may need to be altered upon divorce.
If their ex-spouse is named as the attorney, your employee may wish to instead nominate a parent, sibling, adult child, or trusted professional.
It is crucial for any individual to keep their LPA up to date, as this essential protective document can prove invaluable if an accident or illness causes them to lose capacity.
- Financial protection
One part of an employee’s financial plan that may be linked with their ex-spouse’s is their protection.
Joint life cover, for example, can be a cost-effective way to protect both parties in a marriage – but if the marriage ends, your employee may wonder: “what will happen to our insurance?”
Unless a “separation benefit” is in place to protect the policy from a divorce, couples will need to consider:
- Assigning the existing cover to one party, meaning the other will need to take out their own protection
- Cancelling it altogether, leaving both parties to start completely afresh.
Seeing as joint policies can’t usually be divided, it could be wise for an employee going through a divorce to speak with a financial planner about a new package of protection that works for them.
A pension will be one of the most valuable assets to your employee’s name – yet according to PensionsAge, of the more than 600,000 couples who divorced between January 2016 and August 2022, less than 1 in 8 split their pension assets.
What’s more, iNews reports that 52% of women do not know, or are unsure of, their rights when it comes to pensions in divorce settlements.
If your employee is left with only a fraction of their joint pension savings after divorce, this could have a grave impact on their later-life income, and in turn, their quality of life during retirement.
Fortunately, there are three ways a pension settlement can usually be reached in a divorce.
The greater your employee’s awareness of their pension options during divorce, the more likely they are to achieve an outcome in line with their future goals.
Here are three types of pension settlement that can be reached by divorcing couples.
In the offsetting process, assets are split according to their value. For example, one party may gain a property worth £400,000, while another receives a pension with the same value.
This way, both assets remain intact and do not need to be split up – and both parties gain sizeable assets that can keep their wealth in good stead for the future.
There can be downsides to this, however. If one party cedes the pension and takes other assets, they may not have sufficient pension savings when they come to retire.
Earmarking, also known as a “pensions attachment order”, helps both parties benefit from the couple’s shared pension wealth down the line.
Under this agreement, whoever receives the majority of the pension wealth upon divorce “earmarks” a portion of it for use by the other party. When they retire, the recipient might take this pension wealth as a lump sum, or as income.
Again, there can be issues with this approach as the party receiving the “earmarked” share has no control over their income. They only receive their share when the other party decides to draw their pension.
- Pension sharing
Pension sharing is a successful option for many divorcing couples, especially those who want to ensure a clean break.
When a pension sharing agreement is met, the funds are split equitably between parties. This might benefit your divorcing employees significantly, as it means no party will be short-changed when they retire in future years.
Offering bespoke financial guidance could help divorcing employees navigate tricky territory
Unfortunately, the stress of divorce is often unavoidable.
If you have team members who are currently going through divorce proceedings, it could be constructive to offer financial guidance as part of your employee benefit scheme.
If your team are well-equipped to deal with the financial complexities of divorce, the chances are their stress levels during this time may decrease – proving beneficial for both their wellbeing, and your business’s productivity.
Get in touch
To arm your colleagues with the knowledge and advice they need when going through a divorce, or any other major life event, get in touch today. Email email@example.com or call us on 0330 332 7143.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.