Your personal circumstances will affect whether a lump sum, often framed as part of a clean-break settlement, or regular spousal maintenance payments are the right option for you, and which to choose can be a complex part of resolving the finances during divorce. This article explains the differences and the pros and cons of each one to help you make an informed decision.
Your personal circumstances will affect whether a lump sum, often framed as part of a clean-break settlement, or regular spousal maintenance payments are the right option for you, and which to choose can be a complex part of resolving the finances during divorce. This article explains the differences and the pros and cons of each one to help you make an informed decision.
If you have concerns about your family law situation and you feel you need legal advice, contact specialist family solicitor Helen Miller of Stowe Family Law. She is an exceptionally skilled family law expert with over 20 years’ experience, and Managing Partner at this well known specialist family law firm.
What is spousal maintenance?
Spousal maintenance is financial support paid by one spouse to the other after divorce or separation. It is typically paid monthly, but can be “capitalised” into one lump sum payment thereby creating a “clean break” bringing financial freedom from one another.
Any maintenance award depends on the payer’s ability to pay and their resources, as well as their own reasonable needs. The approach taken by the court is a complex balancing exercise, and the parties previous lifestyle and standard of living will also be taken into account. Both parties will be expected to cut back in a situation where the needs of two households are to be met by what was previously only one. Essentially, the goal is to try to provide support to the recipient in order to allow them to achieve financial independence sooner rather than later.
The court has the power to “capitalise” spousal maintenance, which means that a lump sum will be transferred from the payer to the other which then brings about an end to the spousal maintenance order.
What are the benefits of capitalising spousal maintenance?
There are many benefits of capitalising spousal maintenance payments. These include, but are not limited to the following:
- Allows both parties to have a clean break, effectively cutting the financial ties between them and ruling out any future claims
- Monthly outgoings are reduced for the paying party
- Prevents new relationships from being harmed. Spousal maintenance does not automatically end on the receiving party’s cohabitation. However, a settled, long-term cohabitation might be viewed as sufficient for the court to terminate it, or at least pause or reduce payments. This blocks parties from moving on to new relationships because they fear losing the maintenance on which they depend.
- The ongoing monitoring of the receiving party’s finances and relationships often spills over into arrangements for care of the children. Bringing an end to ongoing spousal maintenance payments often removes tensions and leads to better co-parenting.
- Removes the risk of future variation of spousal maintenance applications being made by the paying party. It is common for variation applications to be fought rather more bitterly than the original proceedings. Costs can quickly mount, and relationships suffer. Capitalisation removes further claims or fear of claims, and the parties can move on.
Ultimately, capitalisation is to some degree a gamble. You may subsequently feel you have settled for too much or too little, and there is generally nothing that can be done about it.
What are the risks of a lump sum payment?
Capitalisation of spousal maintenance can involve parting with a significant sum of money in one go. This could be damaging because what happens in the future is unknown, and circumstances can, and often do, change. The payer may not be able to work in future and their income significantly reduces as a result and having a financial buffer would be reassuring. In such circumstances, spousal maintenance would probably be reduced down, so by capitalising at the point of divorce risks the payer paying more than otherwise if either party’s circumstances change in the future.
In addition, the receiving party will have to rely on one lump sum payment rather than regular instalments. This puts the onus on them to either invest it in such a way as to provide them with an income, or dip into it as and when required. Some people struggle with being financially prudent and are not used to handling money. A lump sum might disappear fast, and there is a real risk that it could be frittered away alongside any security.
Concerns about payments of a lump sum can be amplified where a new relationship appears to have formed, particularly if there is concern that a new partner is financially motivated or manipulative.
Receiving a lump sum may also require some specialist involvement from financial advisors, if the full benefit of the capital is to be realised. These can often be expensive, and investment results mixed.
Ultimately, a lump sum is only possible when there are sufficient funds available to enable a large one-off payment to be made. Not all couples have enough money to do this.
How is a lump sum figure calculated?
Before the lump sum figure is decided, the court has to carry out 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 figure should be.
The standard approach used by the court is to use a Duxbury calculation. This identifies what the lump sum should be, which can then be used/invested by the receiving party to provide income as though monthly spousal maintenance payments are being made. 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 issues and the table should be seen as a tool rather than a strict rule. It should be noted that the court does not have to follow the Duxbury calculation, and the method itself is seen by many as being outdated and providing an inaccurate reflection of the income that the lump sum will produce.
Given the variation in interest rates and the range of factors that may apply, it presents a real risk of there being a significant shortfall. In other words, the money could run out. Many lawyers are exploring alternative options such as input from an independent financial advisor who is arguably better placed to provide more realistic and accurate calculations based on projections and other market forces.
It should be noted that there is no power for a court to capitalise child maintenance. Finances for children are separate with other legal powers available to ensure the children are properly provided for.
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