Divorce is rarely easy, and COVID-19 is unfortunately only adding to the pressure. If you’re contemplating divorce, are in the middle of divorce proceedings or dissolving a civil partnership, you’re probably wondering how the current turbulent financial situation might affect you.
Every divorce is different, and although it’s wise to take advice from a specialist family lawyer, here are some points which might help you decide how best to proceed.
If you have any questions about divorce or dissolving a civil partnership, please get in touch with Jackie Wells.
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In this period of financial uncertainty, divorce lawyers are seeing more enquiries from prospective clients, wondering whether now is a good time to secure a favourable financial settlement whilst the value of their assets is depressed.
In our experience, for every opportunist, there are others for whom the prospect is less beneficial. Having to fund two homes on resources that may only just stretch to maintaining one, against a background of falling investments and job insecurity, leaves little alternative to waiting for the storm to pass. Meanwhile, those who are mid-way through the process may be worried about committing to terms which felt OK only a few weeks ago.
For every couple, deciding what to do for the best will depend on various factors. Here we are looking purely at financial aspects, but your personal safety must come first. In situations where enforced close proximity could spill over into domestic violence or other forms of emotional abuse, seek urgent help on what interim arrangements will ensure everyone stays safe. There’s more information here.
If financial matters will determine what you do next, here are some things to think about:
With the government’s coronavirus regulations restricting movement, sourcing alternative accommodation if you’ve not yet separated will be challenging, unless you have somewhere lined up. Even after the ‘lockdown’ is over, you’ll need to think carefully about the cost of rented accommodation or a second purchase, especially if job security or remuneration levels are not guaranteed. As long as domestic abuse is not an issue and the family can do so safely, it’s possible to live apart under the same roof. This isn’t easy, so think about establishing some ground rules:
- How are you going to explain the situation to any children living in your home?
- Who occupies what space and how will you manage that?
- How will you budget for household expenses and who pays for what?
- Be courteous and respectful of each other’s space and feelings
- New relationships: it’s probably inappropriate to bring a new partner into the home.
If you think it would help to have a written agreement, you can do this yourselves or via a mediator, with help from Relate or a solicitor.
The starting point in any financial negotiations is to evaluate what is in the marital pot. You may well have shared financial information (typically by exchanging “Form E” accompanied by corroborating bank statements, portfolio summaries, tax returns and so on) and perhaps have agreed a joint net asset figure on which a settlement could be based.
Ordinarily, there is a degree of tolerance around the fact that bank balances, and of course the stock markets, fluctuate – but the mayhem caused by Covid-19 is unprecedented in recent history.
If you haven’t reached a binding substantive agreement, one solution might be to cease further negotiations and maintain your status quo, or agree an interim holding arrangement. This could be done informally, or, documented in a deed of separation or interim financial order if you have started financial remedy proceedings with the court.
Alternatively, it might be possible to agree certain aspects, such as dividing the capital, but leaving the income/maintenance related aspects open. Whether this is advisable depends on the nature of the capital assets. If, for example, you contemplated a settlement where one of you would retain, say, quoted shares and the other cash in lieu, this would probably not result in a fair settlement right now.
It’s quite usual to seek a financial settlement that balances risk with monetary value. Specialist family lawyers and the courts are used to ensuring one party doesn’t keep all the copper-bottomed cash-based assets, leaving the other with riskier illiquid or equity-backed ones. Smoothing mechanisms to counter variables in value are routinely built into settlements involving diverse assets and exchange rate fluctuations.
Wealth managers advise not putting all your eggs in one basket, and the same philosophy applies to divorce settlements. Speak to your lawyer about recalibrating how the assets are divided, or building in a self-adjusting formula where there is a balancing lump sum payment or other suitable conditions.
COVID-19’s impact on the markets highlights the importance of obtaining expert advice when it comes to sorting out pension assets on divorce. Many couples have a number of pension assets between them. Understanding the different types of scheme and how their value might be affected by stock market fluctuations is crucial.
Some ‘defined benefits’ pensions such as public sector or final salary schemes guarantee a certain level of income on retirement, usually based on years of service and the final salary of the pension member. Conversely, the capital value and therefore income for private ‘money purchase’ pensions is linked directly to the performance of the investments underlying it. Even if, at a given date, the fund value or cash equivalent of the two types of pension arrangement are the same, the value of the underlying benefits and the reliability of the income stream may differ considerably. It’s crucial to get advice from a qualified finance professional.
Even so, it’s complicated. Pension sharing orders (which determine how pension assets are divided between the parties), have to be expressed as a percentage of the fund being divided, (rather than a monetary figure), so the amount paid to the recipient’s pension fund can differ quite significantly in value to what was originally intended.
This has always been a feature of pension sharing, because pension providers have up to four months to implement the pension share. The rationale for expressing these orders in percentage terms is that both parties should be uniformly affected by any fluctuations in fund value, up to the point when the fund is divided.
If you are close to retirement age and were planning to draw down on the pension part of your settlement in the near future, hoping the proposed share would produce a certain level of income, you may need to think again. Instead, consider a ‘nominal’ maintenance order, to hedge against the anticipated income not meeting your needs. Although this goes against the principle of the ‘clean break’ (drawing a line under the ability to claim spousal maintenance) it may be the only way to meet your needs or achieve fairness in the current situation.
Most City professionals have several components in their remuneration package. In addition to base salary, there’s typically a performance-related bonus comprising both cash and stock. In some instances, the bonus element vests automatically and can be exercised over a period of time; in others it might depend on the stock reaching a certain price and so may not be awarded at all.
It’s vital to understand how each scheme operates. Whatever the rules of any particular scheme, in a COVID-19-afflicted market stock-linked bonuses might be worth a fraction of what was anticipated, so care must be taken when structuring the settlement.
The relative reliability of different sources of income should always be a consideration in any divorce settlement. Many professional families use all their base salary to maintain their home and a comfortable lifestyle, and then use bonuses to fund school fees and life’s luxuries. When it comes to divorce, trying to maintain a stable family home can often see most of the main bread-winner’s basic salary channelled into mortgage and maintenance payments, on the assumption they will achieve a fair settlement by recouping from their bonus when it’s paid. Wherever possible, and particularly where bonuses are not guaranteed, it’s better to try and aim for a more even distribution of the base salary.
Where maintenance is being paid, either to a spouse or a child, there is always the safety net of being able to apply to the court for a variation, if there’s a material change of circumstance. A sustained and material reduction in the payer’s income would be grounds to revisit the level of maintenance being paid. However, these variation applications are usually costly in terms of legal fees. It is better to pre-empt the issue and structure the settlement so the payer does not rely too heavily on the discretionary or stock-linked element of their remuneration.
Generally, the capital components of a divorce settlement can’t be varied, except in exceptional circumstances. This is why it’s always a good idea to spread the risk in terms of the component parts of any settlement. The income (maintenance) components can be varied if there’s a change of circumstance, and this flexibility should ensure fairness between the parties where there has to be an ongoing financial commitment.
When an unforeseen event invalidates the fundamental assumption on which the order was based, relatively soon after the order is made, the court does have the power to re-open the settlement. However, those circumstances are very limited; in 2008, the Court of Appeal took a hard line stating that the market crash was not an unforeseen event. Whether the impact of COVID-19 will be viewed differently remains to be seen.
The court will look at how quickly action was taken after the unforeseen event, so it’s vital to evaluate your situation as soon as possible, if you think you fall into this category.
If the assumptions on which a maintenance order was based change materially, the court will always consider a variation. The challenge is to make sure the legal costs don’t outweigh the reduction you’re seeking to secure. Wherever possible, talk to the other party, explain the situation and see if you can agree a compromise, with a written record of what you have agreed. If this isn’t possible, consider mediation. Some mediators are now offering consultations via Skype and this can be a better short-term solution than spending money on lawyers when resources are tight. If agreeing a compromise isn’t feasible, its important to take advice and not just reduce the maintenance in breach of a court order.
Whether a fall in your income justifies a change in any existing arrangement will depend on the overall circumstances. If you are a high earner, don’t assume that because your income will be less than you were expecting (for example, because you’re not getting a bonus or profit share is down), you are automatically entitled to reduce spousal or child support. Maintenance is a needs-based commitment, so the needs of both parties and any dependant children must be evaluated. Take advice.
Any ongoing maintenance order can be varied if there’s a change of circumstances. Before looking to a former spouse for more support, you will be expected to take all reasonable steps to mitigate your position, including taking advantage of the government’s coronavirus schemes. The availability of other resources will also have a bearing. Wherever possible, have a dialogue to see whether a temporary increase might be possible. If in doubt, take advice.
With coronavirus affecting every aspect of life, separated parents face an additional problem: what happens to child contact arrangements during the lockdown?
Every case is different, so there is no substitute for specific advice from a specialist family lawyer, but here are some general pointers. See here.