When couples divorce, one of the most critical and often contentious aspects of the process is deciding how to divide their finances.

This includes not only obvious assets such as the family home but also pensions, savings, investments, and debts. Reaching a financial settlement can be complex, as it aims to provide fair outcomes for both parties based on their individual circumstances.

The court’s approach to financial settlements

While many divorcing couples manage to reach agreements about finances through negotiation or mediation, the court may need to intervene if an agreement cannot be reached. In such cases, the court has broad discretion to decide how the finances should be divided.

The court’s primary concern is to ensure that reasonable financial provision is made for both parties, and especially for any children. It will aim to achieve a clean break where possible, meaning that neither party will have any ongoing financial obligations to the other beyond those agreed or ordered during the divorce process.

The ‘Matrimonial Causes Act 1973’

In making financial orders, the court relies on the Matrimonial Causes Act 1973. This sets out several factors the court must consider when determining financial settlements. These include:

1. The income, earning capacity, property, and other financial resources that each party has or is likely to have in the foreseeable future.

2. The financial needs, obligations, and responsibilities of each party.

3. The standard of living enjoyed by the family before the breakdown of the marriage.

4. The age of each party and the duration of the marriage.

5. Any physical or mental disabilities affecting either party.

6. The contributions made by each party to the welfare of the family, both financially and in other ways (for example, caring for children).

7. The conduct of each party if it would be inequitable to disregard it, though conduct is rarely a major factor unless it is extreme.

8. The value of any benefit either party will lose due to the divorce (for example, pension rights).

Dividing assets

When it comes to the division of assets, the goal is to achieve a fair outcome. Fairness does not always mean equal, though in many cases an equal split of assets is the starting point, particularly for longer marriages.

The family home is often the most valuable asset, and its treatment can vary depending on the circumstances. If there are children involved, the primary carer may be allowed to remain in the home until the children reach adulthood, after which the property may be sold and the proceeds divided.

Alternatively, the home may be sold as part of the divorce settlement, with the proceeds shared between the parties.

In some cases, one party may ‘buy out’ the other’s share of the property, allowing them to remain in the family home without the need for a sale. This is common when one party has a significantly greater financial capacity to maintain the home.

Other assets, such as savings, investments, and personal belongings, are also considered. The court will assess the value of all assets and determine how they should be divided to ensure both parties’ needs are met. Assets acquired during the marriage are generally subject to division, while assets brought into the marriage by either party may be treated differently, depending on the circumstances.

Pensions

Pensions are often one of the most overlooked assets in divorce, but they can be among the most valuable. When deciding on financial settlements, pensions must be considered alongside other assets, as they represent a significant part of many people’s financial security in retirement.

There are several ways that pensions can be divided in a divorce:

1. Pension sharing – The most common method, pension sharing involves one party receiving a percentage of the other party’s pension pot. This can be transferred into the recipient’s own pension scheme or kept within the original scheme. Pension sharing ensures that both parties have their own pension provision moving forward.

2. Pension offsetting – In some cases, instead of dividing a pension directly, the value of the pension is offset against other assets. For example, one party may keep a larger share of the family home in exchange for giving up any claim on the other party’s pension.

3. Pension attachment (previously known as ‘pension earmarking’) – This method allows one party to receive a share of the other’s pension when they begin to draw it. However, this is less commonly used because it does not provide a clean break and leaves the recipient dependent on the other party’s decisions about when to access the pension.

It is essential to obtain a pension valuation before making decisions about dividing pensions, and professional advice is often required due to the complexity of pension rules.

Debts

The division of debts is another important aspect of financial settlements. Debts are generally treated as joint liabilities if they were incurred for the benefit of the family, such as a mortgage or credit card used to fund household expenses. In these cases, the court will decide how to apportion the debts between the parties, often alongside the division of assets.

Personal debts, such as loans taken out by one party for their own benefit, may be treated differently. The court may consider who is best placed to repay the debt based on income and resources.

In some cases, debts will be offset against assets. For example, if one party takes on more of the family debts, they may receive a larger share of the remaining assets to compensate.

Ongoing financial obligations

While the court aims to achieve a clean break, in some cases, ongoing financial obligations may be necessary. This typically takes the form of spousal maintenance, which is awarded where one party is unable to support themselves financially after the divorce.

The amount and duration of spousal maintenance depend on various factors, including the recipient’s financial needs and the payer’s ability to pay. In many cases, spousal maintenance is only awarded for a limited period to allow the recipient to adjust and become financially independent.

Achieving a fair settlement

Reaching a financial settlement can be one of the most challenging aspects of a divorce, and it is essential that both parties fully disclose their assets, income, and debts. Failure to disclose assets can lead to the reopening of financial settlements, even after the divorce has been finalised.

Many couples prefer to reach financial settlements through mediation or collaborative law, which can reduce the emotional and financial cost of divorce. However, when agreements cannot be reached, the court will make the necessary orders based on the principles outlined above.

Conclusion

Financial settlements in divorce require careful consideration of all assets, pensions, and debts to ensure a fair outcome for both parties. Each case is unique, and the court has wide discretion in determining how to divide assets based on the needs and circumstances of both parties.

A fair settlement often involves compromise and full disclosure, ensuring that both parties can move forward financially after the divorce.