Capitalising spousal periodical payments on divorce: Is it time to include investment advice and ongoing costs?

Professor Emma Hitchings, University of Bristol Law School

from http://401kcalculator.org/

When making financial orders on divorce, the case of Duxbury v Duxbury ([1992] Fam 62n, CA) introduced a calculation which provided a means to achieve a lump sum as an alternative to ongoing periodical payments (maintenance) between ex-spouses. This calculation enables couples to achieve a clean break (i.e. no ongoing financial ties after divorce), so that a lump sum is invested to provide a continuing annual income. In my recent Child and Family Law Quarterly article, on which this blog is based (‘Reconsidering the Duxbury Default’ [2021] CFLQ 275), I explore the Duxbury calculation in greater depth, presenting findings from an analysis of reported cases over the past 10 years and exploring why the courts appear reluctant to move away from it. However, in this blog, I want to focus on a practical concern arising from the continued use of Duxbury – the failure to provide for any allowance for costs incurred in setting up and running the invested funds and why this is important for those individuals who are required to invest a Duxbury lump sum to provide for future income. 

In Duxbury itself, a firm of accountants who acted for the wife devised a computer programme to produce an estimate of the lump sum required to meet her needs. This was based on a range of information, including the net annual amount required by the wife, her life expectancy, and the assumed rates of inflation, investment return, capital growth on the investment portfolio, and growth in tax reliefs and rate bands. Significantly, much of this information is based on assumptions: about rate of investment return; as to life expectancy; about future tax rates and tax bands; and about future inflation rates are just four examples. Notably, the accountant who devised the calculation emphasised its limitations and suggested that the computer model is ‘no more than a useful tool designed to illustrate for the court what sort of capital sum might produce a given net income in a defined, but inevitably artificial, set of assumed circumstances’ (T Lawrence [1990] Family Law 12). 

Despite its continued use, the Duxbury calculation has been subject to a range of criticism, including that it is a ‘crude method’ for calculating a lump sum figure. (Andrea Woelke) This criticism is based on the calculation issues arising from the Duxbury model which are focused on life expectancy and expected rate of return. The Duxbury model has also been criticised for providing an inaccurate picture of the amount of income that a lump sum could produce if invested appropriately. For example, many individuals will be unlikely to be able to invest appropriately to obtain the rate of return that Duxbury requires to meet their income need for life without expert financial assistance on how and where to invest the money.  

Crucially, however, there is no express provision in a Duxbury budget for the cost of professional financial assistance at any point. Therefore, no provision is made to enable the recipient of a Duxbury fund to obtain initial advice on where to invest, ongoing advice on how to manage the fund, nor does it make any allowance for any costs incurred in running the invested funds. Furthermore, Duxbury assumes a relatively high and risky rate of return on investments of 3 per cent gross per annum and capital growth of 3.75 per cent, with average inflation of 3 per cent per annum. Whilst this provides a gross return of 6.75 per cent per annum, once inflation is taken into account, this provides a real rate of return of 3.75 per cent. In a 2018 blog, Edward Gascoigne, a Chartered Financial Planner noted that requiring a predicted gross performance of 6.75 per cent per annum makes Duxbury an ‘investment optimist’. Whilst such optimistic rates of return might work in the larger money case, where the Duxbury sum is big enough to cope with a medium term ‘churn’ of investments in an economic cycle, recipients of smaller sums may well not be able to afford to suffer losses based on such a high-risk investment strategy.  

In the wake of such criticism, the National Lead Judge on the Financial Remedies Courts has previously defended the calculation, both in the course of giving judgment and extra-judicially. In JL v SL (Post-Judgment Amplification) [2015] EWHC 555 (Fam). Mostyn J emphatically rejected counsel for the wife’s submission that the Duxbury calculation is not an accurate reflection of real rates of return. Extra-judicially, a robust defence of the Duxbury formula has been provided by members of the At A Glance editorial team, the Guide in which the Duxbury Tables are published. 

The calculation’s continued use by the courts presupposes that individuals will invest boldly enough to enable a sufficient return on their investment. Yet no express account is taken in the current model of the costs of advice that any prudent investor reliant solely on a capital fund needs. The concept of financial risk and personal responsibility for future financial decisions have become normalised within the Duxbury focused discourse which raises the question about whether it is reasonable to push individual responsibility when the Duxbury assumed rates of return are so optimistic and mismatched from what is available in the market. The assumption that ‘risk’ is a ‘normal’ aspect of investment for spouses in receipt of a Duxbury lump sum is evident in the comments of Cobb J in HC v FW (Financial Remedies: Assessment of General and Special Needs) [2017] EWHC 3162 (Fam), [79], where he suggested that ‘Duxbury contemplates an element of risk’. Responsibility for ensuring an appropriate and sufficient income stream throughout the recipient’s later years is therefore placed onto their shoulders, normalising risk as an accepted aspect of the Duxbury calculation. 

Whilst the sharing of risk may be considered to be a fair outcome where the assets are available and the earned income-stream risk-laden, what is potentially unfair, is not expressly equipping a recipient of a Duxbury lump sum to deal with that risk by covering the significant costs of the professional help that they will need as a distinct budget item. One obvious and straightforward solution to the problem of the current Duxbury model which requires use of the fund itself to pay for professional financial advice in relation to investment options, fund management and ongoing investment costs, would be to include these expenses as a separate element of the recipient’s need-budget. Only this will ensure that the fund addresses the recipient’s full future income need, which properly includes these professional costs. Currently, if an ex-wife has a Duxbury lump sum to provide an assessed need going forward, using even a relatively small portion of it to secure expert advice will chip away at the capital sum and thus affect her future income. This issue will be exacerbated if investment returns are disappointing. It may be the case that even the best advice may not be able to achieve Duxbury’s optimistic assumed rate of returns. However, as the recipient to the Duxbury fund bears the entire risk in terms of investment choices and returns, it is suggested that including investment advice as part of their needs calculation should be a minimum expectation for anyone living off investments over the long term. 

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