In divorce and civil partnership dissolutions one of the powers open to the court is – where circumstances permit – to capitalise spousal maintenance. Capitalisation of a spousal maintenance order simply means rolling future spousal maintenance payments into a one-off payment. Significantly, it does not apply to child maintenance.
The court already has the duty when dealing with financial matters in divorce or civil partnership dissolutions to consider if a ‘clean break’ can be achieved. A clean break brings claims against one another to an end. Capitalisation of maintenance is one of the ways in which a court can help to achieve a clean break.
When can capitalising spousal maintenance be done?
Capitalising spousal maintenance is only possible where one party has sufficient capital to make the payment. From the paying party’s perspective, they make the payment in the knowledge that there can be no further claims for spousal maintenance against them in the future. They must weigh up in the balance whether or not their spouse may remarry at a point before their anticipated maintenance liability would have come to an end (remarriage automatically ends spousal maintenance) and they must consider the other vicissitudes of life. Alongside that, the paying party should also think about whether or not they are confident that they’re going to remain working and think about what the remaining part of their working life may look like. There is little point in capitalising maintenance if your job prospects are precarious or you are working in a volatile industry.
The receiving party has to be satisfied that they will be able to manage financially on the single sum they receive. There may be the benefit of not having that monthly anxiety as to whether or not the maintenance will be paid or if there may be a future application to vary maintenance (please see our earlier blog on when spousal maintenance can be changed). At the time of writing, we are seeing examples where higher earners are losing their income/job as a result of the Coronavirus pandemic, or where their salaries are being substantially reduced. The impact is then felt by the receiving party who, through no fault of their own, is suddenly caught up in the challenge their former spouse faces. I wonder how many of those had the opportunity of capitalising when they were going through their divorce but chose the ongoing commitment. This is a good example of the changes in life that can materially impact upon what is previously considered affordable.
As can be seen from my previous blogs on spousal maintenance, maintenance is calculated by reference to not only the receiving party’s needs but also, significantly, the paying party’s ability to pay. In the cases we are seeing, the receiving party still needs the money to meet their monthly outgoings but the paying party has no income with which to meet them and such it is causing significant anxiety, stress and financial worry.
How is the agreed sum reached?
Before the lump sum figure is decided the court has to undertake an assessment of what future maintenance payments might be. Once that assessment has been made, and subject to it being affordable, consideration can then be given to how to calculate what the payment should be.
The standard approach to capitalising spousal maintenance is to use a Duxbury calculation. A Duxbury calculation identifies what the appropriate lump sum would be which can be used/invested in order to provide income as though it were spousal maintenance payments. The calculation is made by using the Duxbury Tables which are based on various assumptions such as inflation and life expectancy. The Duxbury approach is not without its challenges and the table should be seen as a tool rather than a rule. The court is not bound to follow the Duxbury calculation. As a word of caution, the Duxbury Tables are seen by many as being outdated and not providing an accurate reflection of the income that the lump sum will produce. Consideration is being given to this at the moment, given the variation in interest rates and the range of factors that may apply. For example, they take no account of what it may cost for professional assistance in managing the fund appropriately. This presents a real risk of there being a significant shortfall – in other words, the money could run out. This is probably an area which requires statutory reform.
Nevertheless, Duxbury seems to remain the favoured approach by many Judges. Lawyers on the other hand are exploring alternative methods such as input from an independent financial advisor who many see would be better placed to provide more realistic and accurate calculations based on projections, market drivers etc. You may also want to consider using a shadow expert to satisfy yourself the numbers work for you and so you can make an informed decision on the options before you.
Capitalising maintenance is also an option open to the court on an application by either party to vary the maintenance order. A variation application is usually made where there has been a significant change in circumstances eg one party losing their job or experiencing a reduction in income. Again, my previous blog on this subject may be helpful. However, there may also be circumstances where the payer has come into money, e.g. by way of inheritance, and they would like to capitalise the remaining part of their maintenance order to end the ongoing commitment and achieve a clean break.
Whether looking at things through the lens of the payer or payee, capitalisation has its benefits. For one, it will provide a complete disentanglement both financially and emotionally from your former spouse.
When capitalising spousal maintenance, the court can substitute the original maintenance order with any of the following orders
- An order for a lump sum to be paid to the receiver of maintenance.
- Property adjustment orders.
- Pension sharing orders, although if a pension was shared at the time of the original divorce or dissolution, then that same pension cannot be shared again under this provision.
How can we help?
Financial matters involving maintenance are rarely straightforward as each family’s circumstances will be unique. The most important piece of advice I can give clients on the issue of capitalising maintenance is to seek legal advice at the earliest stage and take time to consider all of the possible outcomes.
For more guidance about your specific circumstances, please do not hesitate to contact us.