do the numbers still add up?

Susanna Murray’s estranged husband Jasper is growing impatient. He is pushing for the two to commence divorce proceedings as quickly as possible and has offered to buy her out of their house in return for not coming after her pensions.

But Susanna, a healthcare worker who works on temporary contracts, doesn’t want to start what could turn into a lengthy legal battle, dip into her savings and accept a low valuation on their house at a time when work is uncertain. For now, she has blocked Jasper on WhatsApp.

“Personally, I have more to gain by not having a clean break. He has been on six-figure salaries plus tax-free bonuses for years,” says Susanna, who asked the FT not to use her real name.

“For now I am trying everything I can to hold him from pushing me into a corner to make decisions,” she says.

She is one of many people going through a divorce who are having to make tough financial decisions in the wake of the UK’s cost of living crisis and economic slowdown.

According to the Office for National Statistics, divorce rates spiked in the 1990s and have since fallen to 1970s levels.

However, 113,505 divorces were granted in England and Wales in 2021, a 9.6 per cent increase compared with 2020. Although this was partially because of a backlog of cases after the pandemic lockdowns, divorce lawyers say the financial stresses of the Covid crisis and, more recently, the rising cost of living have driven more couples to split.

Just over half of respondents to a survey by Stowe Family Law, a law firm, say they are experiencing friction in their marriage because their mortgage rate has risen and 32 per cent say they are staying in a relationship because they can’t afford to live alone.

People familiar with divorce settlements, such as lawyers and financial advisers, say getting divorced is a stressful undertaking at the best of times, but during an economic downturn it is doubly so, for high and low earners alike. As house, pension and business valuations fluctuate in volatile markets, changed circumstances can complicate the passage to a settlement. People may also have fewer resources to pay solicitors’ fees.

According to Antonia Felix, a partner in law firm Mishcon de Reya, more “discretionary divorcers” are holding back from initiating a permanent split. Couples who do are hitting more bumps in the road and trying to change the terms of their settlements after the fact.

“There are more people having issues within, or after, their divorce and making variation applications because one party has lost their job, their pay has decreased or outgoings have gone up and they have less disposable income,” she says.

How are high interest rates, battered asset valuations and job uncertainty compounding what is already a financially and emotionally challenging life event? FT Money investigates.

Home truths

Under usual conditions, a divorcing couple might decide which partner will keep the house and buy the other out of their share, or decide to sell the house and split the proceeds. 

However, falling house prices are hampering many couples’ attempts to secure a clean break. In October monthly house prices registered their first monthly increase since March, but annually they are down by 3.2 per cent, according to data from Halifax. 

“Parties that have been in court or reached an agreement based on figures that were accurate six months ago all of a sudden are seeing hundreds and thousands of pounds wiped off their property portfolios, which could be the difference between [them buying] a four- or three- or even two-bedroom house,” says Irpreet Kohli, a family law partner at Freeths. 

High interest rates are also constraining people’s ability to take out mortgages and buy new properties. The Bank of England’s current bank rate is 5.25 per cent. Although markets were heartened by UK inflation slowing sharply to 4.6 per cent in October, BoE governor Andrew Bailey has continued to stress that investors pricing in three rate cuts in 2024 are acting prematurely.

According to Rightmove, the current average mortgage rate for a five-year fixed, 85 per cent loan-to-value mortgage is 5.35 per cent. 

“What I’m seeing in cases where people are getting divorced is that they are looking for ways not to move,” says Roarie Scarisbrick, partner at Property Vision, a high-end residential buying agent. “People are finding ways to live together. I’ve seen ex-husbands hidden away in the basement flat or annex.”

Tight supply of homes available to buy also means some divorcees struggle to find adequate housing for themselves and their families’ needs. 

After splitting with her ex-husband, Pamela Timms was renting a flat in Camden, north London, with her three daughters when their landlord “pretty much kicked [them] out” as he needed to sell the property due to rising interest rates. 

She was forced to evict a tenant in her small two-bed flat in Islington and move in.

“I share with my little one and the two older girls share,” says Timms, who also requested the FT not use her real name, like other divorcees interviewed. “For three girls and me it’s not easy but it’s what we’ll do until the market changes and I can get it sold at a good enough price.”

Some couples have also turned to “bird nesting”, the practice of rotating living in the home. One party might stay in the property while the other rents or stays with friends or family and then swap places every one or two weeks. The arrangement allows ex-couples to delay selling the home and deciding who will keep the mortgage, while keeping a familiar roof over any children’s heads. 

But maintaining a home and continuing to share finances can be a challenge if a separating couple are at loggerheads. 

“Divorce can be so hostile it is rare that the arrangement works,” says Anna Shadbolt, a family law partner at Dawson Cornwell.

However, falling asset prices can be advantageous for some couples. At the start of divorce proceedings, the assumption is that a couple will equally share the assets built up over the course of their marriage. If the value of those assets, for example a business, has fallen but is likely to rise again when the economy picks up, the economic downturn may be a good time to lock in a separation agreement.

“When splitting assets, if values are down it’s good for the book costs used to calculate capital gains tax. You could use a downturn to your advantage,” says Petronella West, chief executive of Investment Quorum, a wealth management firm. “But think before you act and don’t let your emotions run away.”

But high interest rates mean that this strategy can only succeed if one party can afford to raise capital to pay for the assets.

“While it may appear to be financially beneficial to try to commence divorce proceedings when asset levels are lower, buying out the claims could be difficult,” says Claire Blakemore, a divorce and family partner at Withers.

If neither party can afford to buy the other out or the value of an asset is uncertain, in England and Wales the court may revert to so-called “Wells sharing”, where both retain shares in the business. 

In Scotland, a recent case, Foster vs Foster, set out that a clean break should be achieved when dividing assets. The onus is on one party in a divorce to prove decisively that they lack the resources to buy the other out, at present and in the future.

“Here in Scotland, there is a huge focus on a clean break,” says Nina Taylor, a partner in Lindsays, an Edinburgh-based solicitors’ firm.

Pension contentions

The prospect of being unmarried in old age leads some divorcees to press for a fair and advantageous settlement, including on pensions. But if disputes arise over shared property and children, pensions can often drop down the list of priorities.

Peter Swift’s wife told him on Christmas Day 2020 that she wanted their marriage to end. The following May he had his pension valued at £300,000. Since he couldn’t raise enough money to buy his ex-wife out of their property, his solicitor advised him to give her £100,000 from his pension, and Swift considered that giving her a third of his pension wasn’t such a bad deal.

Then came Liz Truss’s disastrous “mini” Budget, which saw the value of the pound fall, the cost of government borrowing rise and pension funds frantically selling off their gilts, which plummeted in value.

Swift’s pension is currently valued at £200,000, meaning he has signed away half of his pension. He now regrets not trying to adjust the agreement.

“When we were wrapped up in arguing about the percentage of the pension, no one suggested we should get a revised valuation,” he says. 

Much of his pension is also tied up in his self-invested personal pension, which is heavily focused on UK equities. These have performed poorly, relative to other indices like the S&P 500, since interest rate rises began in December 2021.

Swift believes the uncertainty around the value of his pension means it should be treated differently from his wife’s. She is a public sector worker, with a defined benefit pension scheme.

“I said, ‘This isn’t right’,” Swift says. “A government-backed, index-linked pension is not the same as one based on today’s spot valuation. You’re not comparing apples with apples,” he says. “My solicitor said that’s an argument for the higher courts.”

Pensions tend to be split along three lines: sharing, earmarking and offsetting.

In sharing, a court sets out the proportion of the pension to which an ex-partner is entitled, usually expressed as a percentage. In earmarking, an ex-partner receives a proportion of the pension benefits when they are paid out.

“One of the key disadvantages of earmarking is that the ex-partner has no control,” says Tom Selby, head of retirement policy at AJ Bell. “You decide when to take your pension, and if it’s a defined contribution scheme, how much income, if any, to take.”

In offsetting, the party who does not hold the pension retains another asset of equivalent value.

Many women agree to trade off pension assets against property so they can retain the family home and provide stability for children. However, this may mean they have insufficient funds to provide for them in retirement.

In Scotland only the cash equivalent transfer value of a pension that was accumulated during the marriage can go into the pot of matrimonial assets to be split, whereas in England any value built up before the marriage can be distributed.

“In many cases there is a pension sharing order. However, there are still many women who do not seek a share of their husband’s pension,” says Flora Harragin, a partner in the family team at Farrer & Co, a London law firm. “That can leave them in a vulnerable position.”

Donna Miller says her ex was seeking a 70 per cent share of her house. Having put all of the money she inherited after the death of her parents into repaying her mortgage, she is reluctant to lose the property and worries she will have to pull her children out of their private schools.

While her husband has multiple pensions, she does not plan to fight for a significant share of them so that she can keep the house.

“At the moment I would rather have a greater share of the house over the pension,” she says. “That is likely what will happen in the settlement so we can cut ties as much as possible.”