you can still get legal aid for mediation

 

The government has been pushing mediation as the cure-all answer to its decision to end 60 years of legal aid for most family law work.  Everyone can mediate; who needs family lawyers, seemed to be the rationale.  Get rid of expensive legal aid, put lots of  money grabbing family lawyers out of work and mediation will deliver peace, love and understanding.

Right…

Well, the perfect storm in the world of legal services has continued unabated.  Locally, I am aware of dozens of family law solicitors and legal executives who have lost their jobs as a direct result of the withdrawal of legal aid.  I hear that close to 1,000 high street solicitors firms have closed over the last year alone.  In this respect, the government has succeeded: better still, there are no votes lost in casting lawyers onto the scrapheap.

So, with everything going to plan and all those annoying lawyers out of the picture, the mediation take-up will have rocketed, right?  Completely off the chart, right?  Right…?

Oh dear.  Ministry of Justice figures, as reported in The Guardian and other papers, show that the number of couples accessing mediation to sort out their family law problems has dropped by 47% since April – precisely the time when the legal aid cuts were introduced.  That’s nearly a 50% drop-off in 6 months.  How embarrassing for Mr Grayling, the big cheese at the Ministry of Justice.  This is the sort of policy car-crash that should have a resignation letter winging its way to the Prime Minister:

Dear Dave,

I just want to say how proud I am to have served in your cabinet.  We are responsible for some wonderful achievements and I am sure that history will judge us kindly.  However, it seems that I have made a bit of a hash with the meditation mediation wotsit.  In all fairness, I was only doing what you and George told me to do.  You said it would be all right to get rid of legal aid for family work.  Get rid of the lawyers and pack everyone off to mediation.  Bing, bang bosh, all sorted.  That’s what we told all the nay-sayers.

Well, the silly sods haven’t been going to mediation, have they?  They’ve been clogging up the bloody courts as litigants in person.  Then, some trouble maker only went and put in a freedom of information request.  (For God’s sake, can’t Theresa kick these requests into touch when she kills off the Human Rights Act?)  Anyway,  the ministry suits had to admit that mediation has dropped by half in less than a year.  I know, I know, I was blushing like a nun in a knocking shop.

Funny thing is, it turns out that it was the lawyers we have just kicked out who were making the referrals to mediation in the first place!  Who knew…?   Well, the Law Society and Bar Council did warn us that the sky would fall in but they would say that wouldn’t they?  How was I supposed to know this would happen?  I mean, I’m not a lawyer am I?  In fact, I’m the first non-lawyer in charge of lawyer-type things for nearly 400 years, which I have to say, was a master stroke of yours.  Bloody genius.

To be absolutely straight with you, I’ve never really got my melon around this Rule of Law thing.  Apparently, it’s like, really, really important.  All those lawyers, bigwigs and busybodies keep saying me and Theresa are taking the piss.  We show ‘scant regard’, or ‘contempt’ for constitutional checks and balances.  I don’t even understand what they’re getting their undercrackers in a twist about.  Why can’t they use simple language I’d understand?

So, I’ll be off then.  Spend some time with the family and all that.  Give it 6 months to blow over and then give me a shout.  Quite fancy Health.  Just sayin’…  See you at the next country sup.

Back in the real world, I just want to end by reminding any visitors to this blog that family mediation is still available on Legal Aid for those people adjudged financially eligible.  Good luck.

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Married couples tax break

Do not adjust your radio: back to the future

I am still digesting the news that David Cameron has proposed a married couples tax break which has been spun to the press as being worth £1,000. I really thought I had tuned my radio into an announcement transmitted in the late 1950’s which had, mysteriously, taken all this time to reach my DAB radio.  It is a tax allowance, so the net effect, provided both spouses are not higher rate tax payers, will be a saving to the couple of £200 a year.  The papers and news sites were full of it over the weekend:  see The Independent.

I have found myself slowly stewing with anger as the proposal has sunk in.  Why?

Firstly, I have to acknowledge that the proposed tax allowance will be available to gay couples provided they are in a registered civil partnership.  I give credit to the Prime Minister for having previously nailed his colours to the mast of gay marriage and risking the alienation of large swathes of his own party.   So what’s my beef about Dave’s long-promised plans to favour the status of marriage in the tax system?

Here’s what’s rubbing me up the wrong way about the married couples tax break:

  • The message is divisive.  What the proposal says to cohabiting couples is that they are not as important as married couples.  Co-habitees are second class citizens.  I happen to be married.  Does that make me better than the co-habiting person standing next to me in the supermarket check out queue?  Does it mean that I am a better partner to my spouse?  Or a more loving, and attentive, father to my children?  Does it make me a more rounded, more valuable citizen, better able to make an outstanding contribution to the economy, my community and the general well-being of the nation?  The answer, patently obvious to anyone investing more than 3 seconds to the proposition, is a resounding ‘No’.
  • It has ruined the warm glow I had from the announcement by the Lib Dems that every child in England between the reception year and year two would get free school meals.  I was heartened at the time by the Lib Dems’ announcement.  In retrospect, it appears the price of the Lib Dems’ free school meals plan is the free hand given to the Tories to push the married couples’ tax break. (The Lib Dems do not support the tax break but have agreed to abstain in any  Parliamentary vote).
  • It is irrational in the sense that I don’t see it fixing whatever it is the government thinks is wrong with society.  I hear that Mr Cameron is a fan of Nudge theory: that desired changes in behaviour can be achieved by indirect messages rather than beating people over the head with a stick.  The married couples tax break (which will cost £700m a year in lost tax revenue) but is only worth up to £200 a year for a married couple does not seem to me likely to have all those morally lax co-habitees rushing to tie the knot.
  • It is discriminatory.  The 2.9 million people who cohabit in the UK (according to the Office for National Statistics in November 2012) will not feel nudged by this tax discrimination: more likely it will feel like a poke in the eye such is the undiluted message of discrimination that the proposal carries.
  • It punishes children, or at least, is reckless as to the impact upon them.  Yes, I really mean that.  I have railed before about the level of child poverty in this developed society of ours.  Why should the children of married partners get the indirect benefit of this tax break but not the children of co-habitees?  The HM Treasury homepage trumpets its commitment to equality and diversity:

“When making policy, our officials look at the impact a policy might have on protected groups and then consider options to avoid any negative impact on that group.  Ministers are advised of the impact a decision has on protected groups, and this is taken into account when a policy decision is made.”

  • Well, I can’t think of a cohort more worthy of protection than the kids who are on the wrong side of the poverty gap so why should their situation worsen or slightly improve by dint of something they have no control over: their parents’ decision to marry or cohabit?
  • If you are a widow or widower.  Tough.  You miss out.  The married couples tax break is not for you any longer.
  • If you are now divorced, well, you have fallen from your state of married grace. So what if you still have the kids of the marriage to look after?  Hard cheese.  No tax break for you.

What a tawdry, tweedy little policy.  How shabby it looks in the light cast on it by the free school meals announcement.  I suppose co-habitees should at least be grateful that their kids will not be discriminated against at the school dinner table.

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premarital cohabitation and effect in short marriages

 

I recall some years ago, a client asking me to assist her with a divorce.  She had only been married for 8 months. I told her, of course, that English divorce law required her to wait until the marriage was at least 12 months old before she could initiate a divorce.  (There were no grounds for seeking a nullity of the marriage which does not require an applicant to wait).  Then she hit me with the bombshell: she and her husband had lived together as cohabitants for 22 years before getting married.  I had to quickly change my focus and try to explain to her the impact of premarital cohabitation in a short marriage.

 

To the virtual postbag…

The case I mentioned above came to mind when looking into my virtual postbag this week.  K sent me the following:

Hi, my daughter is divorcing her spouse after just over two years.
They cohabited pre marriage and her partner did some work on her house 
which she has owned in her name since 1998. Her partner is claiming for 
work he says he has carried out on the house. If the work was carried out 
when they were cohabiting does this count in a divorce settlement? My daughter
is not sure if they were even living together when the work was carried out.

Well, I can answer this simply (for once): premarital cohabitation in a short marriage is highly relevant.  In essence, the family court will add the years of premarital cohabitation onto the years of the marriage itself.  So, for instance, if there are seven years of premarital cohabitation and only two years of formal marriage, the family court will regard this as a nine-year marriage. However, the premarital cohabitation should ‘seamlessly’ transition into the marriage.  That is, if there is a big gap between the premarital cohabitation and the subsequent marriage then the prior cohabitation may be disregarded.  The devil is always in the detail.

Having a short marriage extended by the addition of premarital cohabitation years is hugely important.  The significance is that in the absence of children, in a short marriage, the court will probably find it easier to provide divorcing spouses with a clean break.  But the longer the marriage the more likely it is that the court will look more closely at the division of capital and the requirement for one spouse to have spousal maintenance after the divorce.  It is often the case that one spouse has brought a capital asset into a marriage, usually in the form of a house.  Bringing a house into a marriage could be seen as a form of capital contribution.  At the point of divorce, spouses will often argue that such a contribution  should be ‘ring-fenced’ and ask that they be allowed to retain the value of the contribution itself.   However, it will become harder for a spouse to argue that they should be allowed to keep their contribution or, the greater part of the value of their contribution, the longer the marriage goes on.  This is because over the course of a long marriage, with the joint endeavours of both spouses to build up capital and income within the marriage relationship, the contribution at the start of the marriage will appear more and more insignificant.

Premarital cohabitation

I do not know about K”s daughter’s situation.  I do not know if there are children in this marriage.   The existence of children, and the prioritisation of their needs by the family Court, will trump most arguments about ring fencing of contributions at the start of a marriage.  Also, if the husband in this case was the main carer of the children while K’s daughter went out to work, then his contribution as a home maker and provider of child care for the children will be regarded as just as important as that of breadwinner.  With the existence of children, the home that may have been in the name of one party only before marriage, evolves over time into the matrimonial or family home.  The family court may therefore regard it as impossible to do justice to both spouses, and the children, if they allow one spouse to ring fence the contribution from many years ago.

I think it is crucial for K’s daughter to establish whether the work carried out on the home was during the period of seamless cohabitation leading up to the marriage. If the husband was just staying at the weekends when this work was carried out then that is unlikely to be regarded as pre-marital cohabitation.   The husband in this case may have paid monies towards the mortgage and therefore argue that thsi increases his  interest in the property.  It is important to note that the marriage itself will probably steer the family Court towards looking at the situation for this couple ‘in the round’.  By that, I mean that the family court is less likely to be interested in looking at receipts from B&Q or Homebase from seven or eight years ago to see who paid for paint or white spirit.  The family Court will take a ‘broad brush’ approach (no decorating pun intended) to sorting out the competing financial claims on divorce.

Finally…

I have written before about the impact of cohabitation in family law cases.  Cohabitation is relevant in the cases of spouses who have lived together before marrying but also in the case of spouses who divorce (and receive spousal maintenance) and then live with another partner.  In my humble opinion, the UK government has failed to provide a legislative framework that can assist the millions of couples who now cohabit rather than get married.  This lack of political will in the face of this profound social change, contributes to inconsistent judicial thinking on cohabitation issues when they arise in the context of divorce financial settlement.

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can my ex claim money from my new partner

Colouring in is harder than it looks

It is a common question in divorce: “Can my ex claim money from my new partner?”  Or: “Can my new partner’s ex claim against me?”  It seems to be a fear for most spouses going through the divorce process who are cohabiting, or thinking about cohabiting, with a new partner.  When I receive questions like this, I always think: this time I will give a really short, clear answer.  But just like my efforts at colouring in when younger, I end up going over the lines.  So it is with my blog posts about English family law.

And so to the virtual postbag.  This is the question, posed by C:

I would like to know that if my new partner and I got together (living or married) could his ex-wife claim on my monthly wage? Plus I own my house outright would she have any claim on that?
Thank you.

Each case turns on its own facts.   This is what lawyers say all the time to just about every enquiry that comes in their direction.  Put another way, it is essential to know the facts of a given situation if any advice is to be given in a legal context. To say anything useful in response to C’s question I will need to colour outside the lines.   And I have written before about the status of co-habitees in family law.  Now, as every regular reader of my blog will know, I do not, ever, give out advice.  I can only make observations or prompt further questions for my readers to consider.

 Can my ex claim money from my new partner?

So, in answer to C’s question,  I can make the following points:

  • Since it is your house, your new partner’s ex cannot make any claim against your property.  Full stop. 
  • I presume that your reference to your new partner’s ex-wife means that he has obtained a divorce and a financial settlement.  If he has NOT finalised his divorce and financial settlement, and you move in together, he must disclose that fact to his solicitors.  If he does not have solicitors, then he must disclose that fact to his wife or her solicitors.  This is called the duty of disclosure.
  • If the divorce and financial settlement have not been sorted out yet, and you move in together then his ex’s solicitors may say that you represent a resource to your partner.  The fact that you are housing him means that he may not need as much of the equity in his matrimonial home as his ex-wife.  If your partner has children from his marriage and they are predominantly going to live with his ex-wife then she may say their housing needs should be added to her own housing needs so she should have more of the equity.  And anyway, her lawyers may say, since you are helping your partner to address his housing needs, the ex-wife can how have more of the equity since he does not have as great a need.
  • If the divorce and financial settlement have not been sorted, and the ex-wife wants spousal maintenance then she will say the fact that you are living together means that you are sharing your living expenses so perhaps this frees up a bit more income for spousal maintenance.  But she cannot claim against your monthly income.  That is your money – not your partner’s nor his ex-wife’s.
  • But, if the divorce and financial settlement have been sorted then the impact of you living together is more limited.  There should be a final court order dealing with the matrimonial finances. The key thing is whether the ex-wife has an order for spousal maintenance. If she does, then she may argue that moving in with you means that your partner is sharing his living costs with you so he can afford to pay his ex a bit more.  The ex-wife may therefore make an application to vary her spousal maintenance upwards.
  • And C should remember to consider protecting her own position in relation to her new partner if she lets him move in.  What about a cohabitation agreement between you to sort out who pays what over the course of time?

I could go on quite a bit with these observations.  The answer to “Can my ex claim money from my new partner?” is not as straightforward as it might appear.  But I have almost worn down my crayons so time to pack it in.

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Piercing the corporate veil in divorce

Prest v Petrodel: Piercing the corporate veil in divorce (not)

 

Plate sin with gold,
And the strong lance of justice hurtless breaks;
Arm it in rags, a Pygmy’s straw doth pierce it.
King Lear, 4.6.170

Piercing the corporate veil in divorce

If you are considering piercing the corporate veil in divorce proceedings, you will need more than a Pygmy’s straw.  The Supreme Court has delivered an important judgment today for family lawyers.  It is the usual heady, divorce cocktail of naughty husbands, big, big money; opaque companies; and imploring wives.  Spoiler alert: justice and fairness win out in the end.

My previous post about this case  Prest (Appellant) v Petrodel Resources Limited & Others (Respondents) [2013] UKSC 34 carried a lovely quote from the Court of Appeal judge who feared that husbands with assets sheltered by company status would be given “an open road and a fast car” to defeat the reasonable claims of their wives on divorce.  The case had alarmed many family lawyers who fear that some spouses will hide certain assets – assets that should form part of the matrimonial pot for division – within company structures.  In other words, the family assets would lie behind the corporate veil and the law would be reluctant to allow the piercing of the corporate veil in divorce.

In this particular case, the husband, Mr Prest, owned the companies and when the High Court first dealt with the case, the Judge ordered some of the company properties and shares to be transferred to the wife, Mrs Prest.  The husband appealed to the Court of Appeal and argued that the orders should not have been made since the court had failed to distinguish between the husband as an individual and the companies of which he was the sole shareholder.   The husband reminded the Court of the long established legal principle that a company has a ‘legal personality’ which is independent of its shareholders.  The shareholders of a company have no interest in or entitlement to the company’s assets.  Therefore, the High Court had made a fundamental mistake when it ordered that the husband was entitled to the properties and shares in his companies and could therefore simply be ordered to transfer them to his wife.

The Court of Appeal agreed with the husband.  Cue: gnashing of teeth from family lawyers who labelled it a ‘cheat’s charter’.  There was to be no piercing of the corporate veil in divorce. The wife appealed and The Supreme Court has now considered the matter: the judgment was released today (12th June, 2013).

Scores on the door

The family court does have the power to order that “a party to the marriage shall transfer to the other party… such property as may be so specified, being property to which the first-mentioned party is entitled…”  As the Supreme Court acknowledged today, the ability of the court to exercise such a power of property transfer requires “a considerable measure of candour by the parties in disclosing their financial affairs”.  Unfortunately for the wife, the court described the husband’s conduct of the proceedings as being characterised by “persistent obstruction, obfuscation and deceit.”

The Supreme Court, like the High Court and the Court of Appeal, before it,  has decided that the piercing of the corporate veil in divorce proceedings will only be tolerated in exceptional circumstances, which would normally involve the husband acting improperly.  Now, there may be a few of you out there scratching your heads and thinking “surely, persistent obstruction, obfuscation and deceit amounts to improper behaviour?” Well, it is certainly improper, but the Supreme Court found little evidence that the companies were set up to frustrate the wife’s matrimonial claims.  Instead, the Supreme Court found that the companies were set up as a form of wealth preservation and tax mitigation.  Additionally, the court concluded that there were remedies available to the wife, such as the transfer of the properties owned by the companies, that would, and should, allow the court to stop short of piercing the corporate veil.

The Supreme Court was clear that the family court enjoyed no special rights, in attempting to provide justice and fairness to spouses, above any other court division.  As Lord Sumption, providing the leading judgment,  states:

Courts exercising family jurisdiction do not occupy a desert island in which general legal concepts are suspended or mean something different. If a right of property exists, it exists in every division of the High Court and in every jurisdiction of the county courts. If it does not exist, it does not exist anywhere. 

But, the Supreme Court still came to the wife’s rescue by finding that the seven properties were owned “beneficially’ by the husband even though not in his personal name.  This meant that the court, using its family jurisdiction, could transfer the properties to the wife and did not need to think about using a lance, or a Pygmy’s straw to pierce the corporate veil.

Interestingly, the Supreme Court emphasised the existence, and usefulness of, the family court’s ability to draw adverse inferences from the husband’s failure to make proper disclosure of his finances.  In effect, the court could speculate as to why the husband might be trying to hide the reality of his financial affairs which is not a function you will find in civil (non-family) litigation.

Despite the pragmatic outcome of this case, the Supreme Court went on, Lord Neuberger in particular, to consider whether the piercing of the corporate veil, could be said to exist as a doctrine.  Lord Neuberger said it did exist.  But in what circumstances should it be deployed by the courts? Lord Neuberger declares:

The doctrine should only be invoked where “a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control”.

I welcome this judgment.  Like other commentators, I am pleasantly surprised at the fairness of the outcome.  However, I do not share the general gush of enthusiasm exhibited by some.  I do not see this decision as groundbreaking or even great news for wives in general.  This judicial approach could be summed up as: let’s exhaust all the other options first.  If everything else fails, we’ll blow the dust off the doctrine and give it a spin but only if the husband is a lying git of the highest order.  And you have the dosh to stay the legal course.

Last word

James Turner divorce finance toolkit Prest Petrodel

James Turner QC

The last word on the topic of piercing the corporate veil in divorce I leave to James Turner QC.  I asked James today for an off the cuff response to the judgment and, despite being extremely busy, as usual, he graced me with a sensible, and level response.

“This is an unexpected result, but it is pleasing to see that the courts are doing what they can to prevent a divorcing spouse from avoiding true justice.  However, it may create problems in future cases when deciding whether or not to join companies and trustees as parties, with the consequential expense of such a course”.

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Sam Jermy Family Law Financial Planning state pension on divorce

GUEST BLOG: Sam Jermy of Family Law Financial Planning

 

 

State Pension Reform

In January of this year, a radical reform of the state pension was unveiled. The proposed reforms will affect millions, many of whom will be worse off under the new scheme.

Changes to occupational and public sector pension schemes often evoke significant backlash and protest. In some cases it has led to national strikes. The response to the proposed state pension reform in contrast has been pretty subdued. One could even say non-existent. So why such a passive response to significant reform? Well, I have a theory:

    1. The majority of us have absolutely no idea what our state pension is worth to us or when it will be paid.
    2. A common perception is that the state pension is likely to be worth very little to us.
    3. For many, retirement seems a long way off. We have enough to worry about in the present

I believe these factors go a long way to explain why pensions and more specifically the state pension often receive little focus in divorce proceedings.

Let’s actually consider what the state pension could be worth to you. Under the new scheme, a full state pension entitlement would be worth £144 in today’s money. If we assume that these payments retain their inflation proofing and consider that they could be paid for say 35 years. On these assumptions, a total of £262,080 would be paid in today’s terms. When viewed in this way, the dull old state pension suddenly seems a little more interesting.

State pension proposals

The Department for Work & Pensions proposal document, “The single-tier pension: a simple foundation for saving”, lays out the detail of the reforms. It is a joyful read at 108 pages. I have summarised the key points below.

      • The reforms will not take effect until April 2017 at the earliest.
      • For those that reach state pension age before implementation of the reforms, they will retain their existing entitlements and benefits.
      • The existing complicated structure of a basic and various additional state pension entitlements will be replaced with a single tier pension
      • For those reaching state pension age after implementation of the reforms, their existing National Insurance records will be translated into a “Foundation Amount”. This Foundation Amount in effect provides a level of entitlement to the new single tier pension. Further entitlement can be built up in the future.
      • The full new single tier state pension is likely to be £144 per week. This amount is likely to be uprated by the highest of growth in prices, average earnings or 2.5%.
      • Individuals will need 35 qualifying years of National Insurance Contributions or credits for the full pension amount.
      • Individuals will require a minimum of 7-10 years to start to qualify for a proportion of state pension.
      • There will be no facility to inherit state pension rights or derive them from a spouse or civil partner (subject to transitional provisions).

The devil in the state pension detail

As usual the devil is in the detail. For the purposes of this post, I would like to focus in on the implications of the reforms for divorce.

The present system facilitates the following:

  • If a person on divorce does not have a full National Insurance contribution record up until that time (currently 30 years), they may apply to substitute the National Insurance record of their former spouse for their own record in relation to all tax years during their working life. They can do so up to the end of the tax year in which the marriage ended or the end of the tax year before they reach State Pension Age (SPA), whichever comes first. This process is referred to as Pension Substitution and is a benefit which needs to be claimed rather than being granted automatically. If the ex spouse subsequently remarries they will lose the benefit of any Pension Substitution top up, unless the remarriage occurs after their State Pension has already come into payment.
  • Any additional state pension entitlement can be taken into account as a financial asset on divorce. This means that part of the value of any additional state pension you have earned could be shared with a former husband, wife or civil partner.

Following the implementation of the proposed reforms, the situation fundamentally changes.

  • It will not be possible to claim pension substitution
  • It will not be possible to share any additional state pension entitlement

The proposal document states:

“The single-tier pension has been designed to ensure that the large majority of individuals will be able to get the full rate in their own right. In steady state, there will be no rationale for allowing people to inherit or derive state pension income based on the National Insurance record of their spouse or civil partner”.

What now for pension sharing orders?

So what does this mean for those divorcing now or in the future? In my mind the following points are relevant.

  • Any pension sharing orders already in place prior to implementation will be honoured. This places a deadline (likely to be April 2017) on getting additional state pension sharing orders in place.
  • In order to qualify for a full state pension following implementation of reforms, it will be necessary to have 35 years of contribution history/credit in your own right
  • Post implementation, divorce lawyers will need to examine the disparity between the state pension entitlement of a husband and wife and consider how this should be taken into account. The disparity may become a more significant factor in the absence of pension substitution
  • It is vital for people to quantify their state pension entitlement and the contribution this makes to their future financial security

A professional financial planner will be able to incorporate an individual’s state pension benefits into a cash flow forecast. By combining state pension benefits with other income and assets, a cash flow forecast can provide important insight into future financial security and needs.

In the absence of additional state pension sharing and substitution, it will become more important than ever to consider future income needs in retirement.

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Sam Jermy works for Family Law Financial Planning Ltd which is an appointed representative of North Laine Financial Management Ltd which is authorised and regulated by the Financial Conduct Authority. North Laine Financial Management Ltd’s FCA Register number is 446522.  The views expressed in this guest post are Sam’s own. Please contact your own independent financial adviser or family lawyer if you believe the issues raised by Sam impact upon you. Alternatively, please post a comment or query below and Sam will do his best to respond.

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Divorce financial planning and interest only mortgages

A bridge too far? Interest only mortgages

There is a worrying report from the Financial Conduct Authority (FCA) about interest only mortgages.  With an interest only mortgage you pay off the interest on the loan each month but nothing towards the capital you have borrowed at the end of the term.  If you do not have a savings plan to meet this capital payment at the end of the term, which could be at the point of retirement, you will be in trouble.  The report refers to some 2.6 million interest only mortgages coming to maturity between now and 2040.

The aspect of the report that struck me, is as follows:

More worryingly, it found some people were “underestimating the problem”: 37% of those quizzed reported a definite or possible shortfall between what they will have to pay the lender when their mortgage term ends, and what their savings, investments or other strategy will deliver. And borrowers who were able to give a figure believed their shortfall would be, on average, £22,000. But when financial modelling was carried out, the proportion who may not have enough money to pay off the loan jumped to 48%, and the average shortfall was “considerably higher”, at £71,850. That sum is approaching half the average £162,000 house price in England and Wales.

An article on the FCA’s report can be read in The Independent.

What now for interest only mortgages?

As a family lawyer specialising in financial settlement I want to know how my advice today will affect my clients in 10, 15 or 20 years’  time. I normally take a dim view of the opposing lawyer who suggests that my client should consider interest only mortgages when I know she will not be able to build up savings in the future on her present or predicted income.  As readers of my blog will know, I think that ‘reality-testing’ any proposals for settlement on divorce or separation is crucial.  One way to do this is to make sure that financial planning advice has been obtained.  The financial modelling referred to in the FCA report is precisely the advice I import for my clients so they know exactly where they will stand in the future if they accept a settlement proposal.

It does not mean that interest only mortgages would not be right in some situations, but I fail to see how a client can make an informed decision today if they are not being assisted to look at their financial health tomorrow.

If you do find yourself facing a shortfall then consider some of the options in this useful article in The Guardian.

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Divorce calculator simple interest

 

As I confessed in an earlier post, I can’t resist a good divorce calculator.  I was talking then about a divorce calculator for journey costs.  The thingymajig  below calculates simple interest on a given sum. I know, you could probably do the maths in your head, but in a lighthearted way, I want to highlight the usefulness of interest in divorce and separation cases.

 

A divorce calculator for interest

 

  • In a divorce settlement, your spouse may offer to pay you a lump sum.  The lump sum may be to compensate you for, as an example, transferring over the interest in the matrimonial home.  But the problem is, your spouse says you will will have to wait for the whole sum or part of it.  If you agree to wait then the money is not sitting in your account earning interest.  Yes, I know that savings rates are rubbish but, in the legal world, cash is king.  If I am going to agree to my client waiting to get their hands on an agreed lump sum I will ask for interest at the court rate.  That, by the way, is 8%.  Yes, I do mean 8%.  If you can find a savings account offering anything near 8% then I’m a monkey’s uncle.  So demand interest.
  • You have separated from the partner of your children.  You want to agree child maintenance.  You realise that inflation will eat into the value of the payments as time goes by.  So, you agree to increase the payments on an annual basis by a set percentage.  The figure is up for agreement although you can of course vary it each year.  Inflation last year was 2.7% so you would want to agree at least 3% to keep pace with inflation.
  • In a divorce or a co-habitee separation one of the parties pays off a joint debt.  It is agreed that half of the sum paid out will be reimbursed but there is a worry that the commitment to repay may fade with time.  You can agree to apply a relatively high rate of interest on the unpaid sum so there is an incentive not to delay payment.  Example: John has a credit card debt of £7,000.  It is agreed with his ex-partner, Sue, that at least £6,000 of that sum was for joint spending.  John agrees to pay off the whole sum but Sue will owe him a ‘credit’ of £3,000.  Sue does not seem very focussed on when or how she will re-pay John the £3,000.  So, before paying off the credit card liability, John and Sue agree that he will be paid back the £3,000 within 28 days.  But in the absence of payment at day 28, interest will run at 8% until it is paid off.  Sue therefore needs to get a move on.

I will try to track down some other calculators that I think might be useful in a family law situation. Don’t knock it – it keeps me off the streets.

 

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pension planning on divorce needs financial planning

Divorce and pension planning

Pension planning on divorce is crucial.  After the matrimonial home, the asset of greatest value accrued during any marriage is likely to be the pension pot.

One of the challenges for a family lawyer is to explain to a client, especially a wife, why she should not ignore her lack of pension provision during divorce proceedings. Understandably, most clients’ priority is the welfare of the kids.  Or keeping the family home.  But once a divorce is obtained, it is imperative that the family lawyer has imported expert advice for pension planning on divorce for the client.  There are three main outcomes to this pension planning:

  • Pension offsetting.  This is where the pensions are valued but are not subjected to pension sharing or pension attachment.  So, for example, the wife may decide to keep a cash investment saved elsewhere during the marriage but leave the husband’s pension untouched.
  • Pension sharing order.  This is where a specific pension fund, or a number of funds, are split, along percentage lines.  So for example, the husband’s pension fund with Many a Muckle Assurance Ltd worth £100,000, is split so as to give the Wife 40% of the fund value.  The details are drawn up on a pension sharing annex and attached to the family court’s financial order on divorce.  The pension is split reasonably quickly, once the pension trustees have had time to implement the order (they have 4 months, in fact).  You can’t actually get your hands on the money, of course, it is hived off to create your own pension fund ready for your retirement.
  • Pension attachment order.  The pension fund is not split.  Instead an order specifies that a proportion of the pension fund’s benefit, when it pays out at the husband’s retirement, is paid to the wife.  Beware: the order dies with the husband so the income is lost to the wife. Ditto if she remarries.  This is only used by lawyers in pension planning on divorce in very specific circumstances.

I still come across cases where lawyers have neglected to pay enough attention to pension planning.  By way of example, they have neglected to obtain a value for the Additional State Pension for their client or the spouse on the other side.  You only need the modest little BR20 form to get this value.   Or they accept a pension scheme fund valuation for a final salary scheme instead of importing expert assistance to test the assumptions used in the valuation given.  The difference can run into tens of thousand of pounds.

But it is not just being savvy enough as a family lawyer to realise the valuation issues arising in pension planning on divorce.  The benefit, it seems to me, of making sure financial planning advice is obtained for a client is that they are guided on two key areas:

  • The need to continue to contribute to a pension fund after divorce – this is crucial.
  • The need for cash flow modelling from a financial planner during the divorce negotiations so that a specific income need allowing for pension payments after divorce is secured in a maintenance order before the divorce is finalised.

I brushed the dust off this post on pension planning (I have at least 10 draft posts lurking in the wings) when I read about recent research by the Phoenix Group on pension provision for women after divorce.  Some of the conclusions are worrying:

 

    • One in three divorced women don’t save any money at all
    • A staggering two in five (38%) have no idea what settlement they received after their divorce
    • Only 6% received pensions sharing order or a pension earmarking order 

All in all, this just reinforces the need for family lawyers to insist upon seeking pension planning advice on divorce for their clients.  Leaving it until after the divorce is simply too late.

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Family lawyers should import financial planning

Family lawyers should import financial planning advice

I still surprise some of my clients, sitting in front of me with a pressing need for legal advice on a family law matter, when I take an avid interest in the identity of their other professional advisers and enquire about the financial planning that I expect to see in place.  I suppose they expect me to launch into questions about unreasonable behaviour or compromising comments on their spouse’s Facebook timeline.

I’m always surprised that they are surprised.  I wouldn’t dream of dealing with, say, a client who is facing divorce proceedings who owns a business, without talking to his or her accountant or financial planner.  I will want to understand how the business, and the family unit, ticks and how both may be affected by the advice I will be offering.

As a family lawyer dealing with divorce, civil partnership or separation issues I always have one eye on the financial planning issues that will arise in a case.  When I refer to financial planning, I do not mean sitting down with a divorce client and simply subtracting the outstanding mortgage from the value of the matrimonial home to work out the net equity.  No, I mean something much more sophisticated and, in general terms, beyond the skill set (and regulatory authority) of lawyers.

I will set out just a few examples.

Financial planning in divorce and civil partnership dissolution

With the exception of the most straightforward of divorce cases, perhaps one where there are no children or little or no assets, I would look to import financial planning advice for my clients.  The following scenarios are familiar ones:

  • The family home may need to be sold but this will involve exploring realistically the mortgage capacity of each spouse.  How much can be borrowed and what would be taken into account by a mortgage lender as income?  Will bonuses count?  If a wife is to receive maintenance payments from her husband after divorce, will this count as income in her name and improve her ability to obtain a mortgage advance?  
  • How much money will there be to live on: now, in five years’ time, or at retirement?  When family lawyers sit down with their clients to complete financial disclosure they need to detail all the outgoings their client will face.  Speaking frankly, for most lawyers, this has always been a bit of a chore.  There’s nothing exciting about working out utility costs or the public transport costs for your client to get to her new job.  Where’s the law in that?  So it tended to be done in a pretty slapdash way.  But this exercise is crucial.  The outcome impacts directly upon your client’s quality of life after divorce. It deserves some time and attention.  Financial planners use fairly sophisticated cash flow software that models the fluctuations in income and outgoings for clients over a long period of time.  In other words, they properly plan for the future.  This data is invaluable for the family lawyer who wants to negotiate the best outcome for their client in any divorce settlement.
  • Never mind the family home, what about the pensions?  How many times have I had a client say to me: “My husband says it’s not worth bringing pensions into it. We should ignore them”.  It is surprising how often pensions appear to be ignored.  I don’t ignore them.  I have them valued and then I decide whether they can be ‘ignored’.  Pension valuation can be difficult.  And let me make one thing clear.  £100 of pension funds for a female client is not the same as £100 for a male client.  You see, women live longer (just have a look at the figures kept by the Office for National Statistics).  So that £100 for a woman has to stretch further.  In simple terms, it will not yield as much income in retirement.  And here is another common refrain: “My husband says we should split the pensions in half.  That’s fair”.  Well it’s sounds fair, but it probably won’t be in the long run.  Any family lawyer who fails to obtain advice from an appropriate expert, such as a financial planner, with the relevant pension expertise, is selling their client short.
  • Maintenance payments for a spouse or children may have been agreed.  But what happens if the payer of maintenance dies?  I don’t understand why more lawyers don’t obtain advice for their clients on cost-effective insurance policies to pay out in the event of death.  This solves any cash flow problems for the ex-partner who would otherwise struggle with the financial burden of any children of the marriage.  And it also helps to prevent claims against the estate of the deceased under the Inheritance (Provision for Family and Dependants) Act 1975.

Financial planning for cohabitants

  •  The law in England and Wales does not provide adequate protection for couples who have cohabited, in some cases, for many years, and even had children.  Living Together Agreements can provide a sensible financial planning exercise for the relationship ahead.  It is particularly important where property may only be owned by one party or there is a common purchase but with unequal monetary contributions.  It is crucial for Wills to be put in place if proper provision is to be made for the other partner.  It is also possible to put in place nominations for death benefits under certain pension entitlements.  Life insurance, again, can become a sensible step to take to ensure that untimely death does not leave partners or children in the lurch.

I am fortunate in my day job as I can call upon my colleague, Sam Jermy, a financial planner, to help my clients.  The need to import financial planning advice is so integral to the family legal work that my firm undertakes that we formed a joint venture with a firm of chartered financial planners.  A free initial consultation is perfect to identify the issues that I need to concentrate on in obtaining the best outcome for my clients.  I appreciate that not everyone has access to a chartered financial planner.  But, if you find yourself encountering some of the issues raised in this blog post, ask your lawyer if financial planning advice is needed.  Don’t leave it until the doorstep of the court or the drawing up of the negotiated settlement – an opportunity for prudent and informed financial planning will have been missed.

STOP PRESS: I’m pleased to announce that Sam Jermy, a financial planner with Family Law Financial Planning, has offered some guest blog posts on the financial planning  work he conducts with family law clients.  In keeping with the vast Divorce Finance Toolkit budget at my disposal I have agreed a package of chocolate digestives and tea for Sam’s blogging contribution.  If I judge his blog posts to be particularly helpful for my readers I will even let him dunk the biscuits.  Watch this space.

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