The deep emotional stress involved in a marriage break-up is difficult enough, but for many wives who had only worked within the home during the marriage, a separation or divorce means they must also learn to cope with the financial repercussions of the split.
Mrs N from Waterford has been married for nearly 30 years and is now in the process of a judicial separation. She stayed at home to raise the children and manage the household and never earned an independent income. She has no pension, no life insurance, no savings of her own and will have to pay tax and PRSI on any maintenance payments she receives from her husband.
Mrs W from Co Meath has been married for just 10 years. She hopes to resume her career in health services once she and her husband separate (with an intention to eventually divorce). She has no independent means either and notes that her husband, "who wishes to keep the separation `amicable' for the sake of our two children is offering to pay and arrange for the lawyers so that my costs will not have to be paid out of any settlement".
Both women are looking for information and advice about the financial issues they need to tackle - pensions, savings, mortgages - when they become independent of their husbands.
Family Money sought advice from Ms Nora Ward, a solicitor in the legal firm, A&L Goodbody who specialises in family law and separation cases and Ms Kay Roche, a manager with the private clients' division of the accountants and consultants, KPMG.
The first thing both these women need is independent legal and financial advice, but particularly Mrs W whose husband has offered to arrange all the legal matters. "If you let your husband try to organise all the legal advice, what is in his interest will not necessarily be in your interest," says Ms Ward. "Without totally separate legal representation you would be cutting yourself off from certain avenues that might be more to your advantage in any settlement."
Proper legal advice is especially important in the light of a recent Supreme Court case, she says. At the moment a couple who wish to separate can go three routes: they can arrange a separation agreement, which can be arranged between them without reference to the courts; they can arrange a court order for judicial separation which is more formal, complicated and expensive and does require court appearances, or they can seek an order for divorce, the most time consuming, expensive and the most final route.
According to Ms Ward, the Supreme Court case concerns a couple who years earlier had signed a separation agreement which the husband wanted replaced by an order for judicial separation so that the family home be sold or a portion transferred to him.
He also wanted a lump sum payment to be made to him by his wife. The Supreme Court refused to overturn the existing separation agreement, but, says Ms Ward, the judgment does not preclude any couple with a separation agreement, (or a judicial separation agreement) from seeking a divorce.
A separation agreement may be a less costly, and less formal way for couples to separate, but it does not carry the same authority or weight as a judicial separation since there is no judge making sure that pension or life assurance provisions, for example, have been split fairly. In light of the Supreme Court case, a wife who agrees to a separation agreement - especially one that her husband has arranged and paid for as in Mrs W's case, may find herself in a poorer financial position ultimately than if she sought independent advice and opted for a judicial separation, says Ms Ward.
A separation agreement would not prevent our reader from petitioning for a divorce at a later stage, but there are time and financial constraints involved in going that route and in the meantime she would not be able to amend the existing separation agreement.
Our two readers are typical of women (especially older women) who gave up careers or jobs to marry, raise children and take care of the home. While amicable financial arrangements can and have been made under ordinary separation agreements, a judicial separation makes legal requirements on the parties to settle their financial affairs fairly. In addition to the family home it also requires that pensions be split and that life assurance cover be taken out on the husband's life for the benefit of the wife and dependant children. The husband is required to maintain the payments on the policy for his ex-wife until her death or remarriage (if there is a subsequent divorce).
According to Ms Kay Roche of KPMG, the tax implications of setting up life policies for the benefit of a spouse need to be considered carefully. If there is a judicial separation or a divorce pending, a judge can make a financial compensation order which requires that a life assurance policy is arranged on the husband's life on an own-life-in-trust basis. The husband pays the premiums out of gross income as part of the maintenance settlement to his wife under the provisions of the Family Law (Divorce) Act 1996.
By arranging it this way, the ex-wife will enjoy any benefit from the policy tax-free on his death, but should she die or remarry, the policy ceases.
Similarly, under the judicial separation and divorce orders, the husband's vested pension rights will be split or a part set aside for his wife or some other form of compensation be made to the ex-spouse to take into account that under our current pension legislation she could never have her own pension because she had no employment income of her own.
New wills will be made as part of a judicial settlement or divorce, and the ex-wife will no longer enjoy a Capital Acquisitions Tax-free status if she inherits from the husband. This is why financial arrangements are made prior to the judicial separation or divorce. But it is also important that a life assurance policy be taken out on her own life if she has dependant children. Set up in trust for the children, the money (whether or not the father gains full custody of the children) can then be used for their maintenance and education; this could include the hiring of a housekeeper/nanny by the father.
Once the legalities are out of the way, the separated or divorced woman has to learn to live with her new, and usually, depleted financial situation, says Ms Roche. Maintenance payments will be subject to tax on a single-person basis; she may or may not have to pay mortgage payments from this income. If her husband dealt with the family finances other than housekeeping ones, she will need to learn to budget on a macro, rather than micro basis and this includes the cost of running and maintaining a car, the house, all insurance issues, budgeting for the children and their education, health matters and holidays.
"She should certainly check out whether there are any personal finance courses or local agencies in her area that can help her learn about these things," says Ms Roche. She may also want to take a FAS back-to-work course in order to find a full or part-time job to supplement her income. Once she has an income she can think about a tax-efficient pension - either an occupational one or a personal pension, though there may not be a lot of time for a fund to build up before she reaches retirement."
She needs to be particularly careful about the setting up costs of such a pension, she warns. A safe, long-term equity-based savings policy or bond may be a better option. There is no tax relief on premiums, but the return is tax-free.
If the Government's plan to set up Personal Retirement Savings Accounts proceed, everybody, regardless of their income status will be able to open their own personal pension, though annual tax relief on the premiums will only be available for people with employment income. It is still unclear whether maintenance income from a spouse or ex-spouse will be allowable for income tax purposes, but if it is, this will certainly be a real benefit to ex-spouses who are unable to find employment, says Ms Roche.
Current and savings accounts and credit cards will also need to be set up in her own name and the relevant standing orders or direct debits switched. Joint savings accounts should also be split and a separate account in her own name be set up. This is especially important if the account is with a mutual company - a building society or life assurance company, for example, that may go public someday and issue free shares - but only to the first-named holder of the account.
Finally, a separated or divorced wife should also ensure that her private health care provisions are not overlooked as part of a settlement. She should check with the Department of Social Community and Family Affairs about her dental entitlements.
