Since the beginning of 2022 we have seen increases in interest rates and economic forecasts expect rates to continue to rise well into 2023. The impact on this will be significant for families across the UK, but will there be an impact on couples getting divorced?
Director Rachel Buckley explains some of the areas separating couples need to think about.
The impact on asset values
A financial settlement is when a couple agree on the value of assets including investments, shares, digital assets and pensions. With a volatile market it may be necessary to ensure values are produced regularly. With things changing so frequently this will ensure you have an accurate reflection of what your assets are worth in the current market.
If you have expert valuations that have been prepared during negations or financial proceedings, you should consider asking the expert to update their findings based on current market conditions. There may be impacts profitability and income. Reliance on previous performance or last year’s accounts may not be a reliable indication of how a company will perform.
Couples with overseas investments or property the fall in the pound could create difficulties when considering assets and it may lead to some couples revisiting financial settlements to recalculate how assets had been divided.
The courts made it clear in case law following the 2008 financial crash that financial agreements that had already been approved by the court could not be revisited due to unpredicted economic change and that market fluctuations do not justify reopening and re-drawing capital orders. In some limited circumstances, there may be scope for agreements made by consent and orders that have been approved but not yet implemented to be adjusted where market volatility has resulted in an unfair outcome that is not in line with what the parties (or the court) had intended. However, it is important when crafting a settlement to consider the nature of the assets as to which are more “risky” /“violate” assets compared with more stable assets and to consider how those assets are to be divided so that one party is not taking all of the risky violate assets compared with one party having only the more stable assets. The risk is shared.
Mortgage rates
Increasing mortgage rates will also have an impact on the financial settlement of a divorce. For many separating couples one of their biggest concerns is what will happen to the former family home. The court’s overriding objective when dealing with a divorcing couple’s financial assets, is that of fairness but with the costs associated with increased borrowing the ability to purchase property to meet the family’s needs will need to be considered carefully.
Income and tax
The changes implemented to taxation under the new government will also need to be thought about and reviewed when agreeing the terms of a financial settlement. We work closely with other trusted professionals to ensure clients understand any tax changes in both corporate tax or personal tax. This also means we can pre-empt future tax announcements whether it’s the announcement later this year or the Spring budget in 2023.
Spousal maintenance
With changes to the cost of living it is important that separating couples consider reviewing income needs schedules, they need to accurately account for rising prices. Any agreement should meet financial needs now and in the future. Getting your budgets up to date will help give you some security. If you have already reached an agreement you may be able to seek a variation application.
Ongoing spousal and child maintenance orders are variable where there is a change of circumstance. If there has been a significant change to the payer’s income, or if a recipient can no longer meet their own, or any child’s needs, from the sum being paid there may be scope to revisit the income order.
If you are in receipt of maintenance and it is index linked to inflation, check the terms of the order and ensure that the rate of maintenance is increased if appropriate. Often, this is provided for automatically in a spousal maintenance order.
Pension sharing
Guidance from the Pension Advisory Group in July 2019 stated that in any cases based on the parties’ needs the court will look at sharing the whole of each parties’ pensions, not just the pension accrued during the marriage.
The recent rise in Bank of England rates may have a major impact on the Cash Equivalent Value of pensions which is the figure that most divorce settlements rely on. A change in the CEV may have a dramatic impact on a pension sharing order that is being calculated but has not yet been implemented. This is because pension sharing orders take a percentage of the transferor’s schemes based on the valuation at the time the calculation was made. If there is a change in the value of the pension before it is implemented, this means the transferee will receive a much lower pension credit than expected.
For separating couples who are agreeing to offset the value of their pensions against other assets such as cash or property, should beware there’s more risk now that the CEV will not be a reliable indication of the asset’s market value.
Settlements that have been finalised
The courts are clear that fluctuation in economic markets does not automatically allow couples to reopen financial settlements. In limited circumstances it is possible to delay the payment of lump sums or restructure a deal if the impact is significant, or if the change was significant and unforeseen.
Separating couples who are concerned that a financial agreement may have been impacted by the change in interest rates and the value of the pound should speak to a specialist divorce and finance lawyers who will be able to assist.
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