The financial implications of divorce

Adapted from an article by David Thomson, Senior Legal Adviser at Sanlam Trust.
 
Nobody gets married with the intention to get divorced, but the divorce statistics are material
The harsh reality is that 40% of marriages end in divorce before the 10-year anniversary. The latest figures from Stats SA reveal that 25 326 divorces were granted in South Africa in 2016.
One of the thorniest aspects of divorce is its financial implications
Divorce is an extremely traumatic event on its own and financial considerations play a huge part. People should therefore make sure that they carefully consider the bigger picture when it comes to evaluating their financial situation and making decisions. If you get divorced and are legally entitled to a portion of your spouse’s retirement money, take care before you think of this money as a ‘windfall’ to spend. Instead, remember that it was initially intended to provide a comfortable retirement.
During a divorce money tends to take centre stage regarding future life decisions
For starters, where just one person was the breadwinner in a household, divorce will often result in the other person now having to find a job. These scenarios mean divorce often accompanies difficult decisions about where you are going to live – whether to buy a new home or to rent for a while. You have to ask yourself what your retirement will look like if you took the money and bought a property. Some fortunate people buy a house, raise the children, sell it at a profit in future, and then plough that money back into their retirement savings. But it takes huge discipline to actually carry this out.
Divorced people often have to save more to make up for the multiple costs of divorce
Whatever decision you make, make sure that you base it on a holistic picture that takes into account your living expenses today and your retirement needs in future. Don’t try to guess what your retirement needs are going to be – get a professional financial adviser to calculate this for you. When balancing your immediate needs with retirement savings, the other critical issue to consider when you get divorced is how to boost your retirement provision, especially if you intend to enter into a new relationship. Divorced people often have to redouble their savings efforts to make up for the divorce settlement withdrawals and the fact that they’ve missed out on the effect of compound interest.
You may have to rethink your retirement plans, depending on your age
You may need to rethink your whole retirement philosophy because the retirement plans you had with your ex-spouse may not be realistic now – given your new financial realities. This is especially true if you find yourself in the ‘silver-hair divorce’ situation, which is now a growing trend. When you divorce later in life, you’ll need to be more conservative in your investment approach. On the other hand, people who divorce at a younger age have more time to ride the markets and they can therefore be more aggressive in their approach. When you are still young, you can consider a portfolio that is geared in favour of equities rather than cash for example until you approach retirement.
Not married but co-habiting? Be sure to enter into a legal agreement to regulate your finances
All parties co-habiting should take the same view as people in a business partnership with each other. They should enter into a legal agreement to regulate their proprietary affairs so that should the partnership terminate, there will be binding guidelines in place to determine how the property will be split up. The best time to enter into this agreement is when both parties are on good terms with each other and expect the relationship to be long term. If you wait until one of the parties wishes to go their own way, it will be too late.
A domestic partnership agreement is one way to deal with life partnerships
This is similar to entering into an antenuptial contract. It will detail each party’s rights and obligations, for example:

  • Rights and obligations regarding any jointly owned property, including the division of jointly owned property
  • Their rights and obligations towards each other

It helps to be empowered when it comes to money – even if it’s not your strength
Life is fickle. Circumstances beyond your control could rapidly change your life, whether it’s divorce, death, pregnancy, losing your job, needing to move or unexpected bills. There are a lot of good reasons for everyone to be financially prepared. When dealing with separation/faced with a divorce there is always one party who is less involved financially, and less prepared (and it’s not always women). Many people from all walks of life, at every level of success, have a distant, unattached feeling towards money, coupled with personal anxiety. And eventually this feeling catches up. So how do you empower yourself financially?
Being financially empowered means feeling secure about your finances and your future
It means knowing where you are at financially, and more importantly, where you are going. Financial empowerment goes hand in hand with financial literacy. You can’t have one without the other. But being financially empowered goes above and beyond financial literacy. It means you know how financial literacy applies to your life and your situation. You need to deliberately get involved in, and at the very least be aware of the financial decisions you and your partner make. It doesn’t help to be an ostrich and hide your head in the sand. You have to ask the right questions and be involved in the financial aspects of your relationship; and get professional financial advice together.
Practical tips and questions to ask your financial adviser

  1. What are the implications of your marital regime or domestic partnership arrangement?
    In South Africa, and specifically in respect of our tax law, the definition of spouse includes, among others, ‘persons who are in a same-sex or heterosexual union which the Commissioner is satisfied is intended to be permanent’. In short, this means that people who fall within this definition are, for purposes of estate duty, capital gains tax and donations tax, treated as spouses. This is obviously beneficial when it comes to personal financial planning, particularly estate planning.
  2. If your relationship ends, what will happen to the property acquired during the course of the relationship?
  3. Does provision for retirement include both partners or will you both be reliant on one partner’s pension/retirement fund?
  4. Will either of the parties need or be entitled to maintenance should the relationship terminate?
  5. What is the intention of the parties if either dies in terms of the other inheriting? It is critical to have current and up-to-date wills in place to reflect your intentions and wishes.
  6. Is there enough provision for the surviving partner and dependants?