Law Articles

Capitalising Spousal Maintenance on Divorce and Dissolution 11/07/2024

In the realm of family law, the court wields the authority to convert periodic maintenance payments into a lump sum under specific legislative frameworks. This transformation, often referred to as capitalisation, is governed by section 31 of the Matrimonial Causes Act 1973 and Part 11 of Schedule 5 to the Civil Partnership Act 2004. This process empowers the court to order lump sum payments in lieu of ongoing periodic payments, essentially severing the financial ties between the parties involved, with the aim of achieving a clean break between the parties.

The court's approach to capitalisation is influenced by a myriad of factors, including the parties' needs, resources, and conduct. While capitalisation offers the advantage of finality, it also presents challenges, particularly in accurately predicting future needs. Ultimately, the court's primary objective is to foster a clean break, enabling both parties to move forward independently.

Understanding Capitalisation

Capitalisation refers to the process of converting regular maintenance payments into a single lump sum. This method effectively terminates the financial linkage between the parties, fostering a clean break. A clean break is characterised by the cessation of financial obligations between the parties, allowing them to completely sever their economic ties without the need for continuous maintenance payments.

Periodical Payments Explained

Periodical payments, commonly known as spousal maintenance, are regular payments made by one party to the other, typically on a monthly or weekly basis. These payments are designed to provide financial support post-divorce or dissolution of a civil partnership.

Court’s Authority to Order Capitalisation

he court's power to order capitalisation is retrospective, meaning it can be applied even if the original court order predates the introduction of capitalisation powers. However, the power to make pension sharing orders in lieu of spousal maintenance is restricted to cases where the divorce or dissolution proceedings were initiated on or after 1 December 2000 which is when pension sharing was introduced.

When considering an application for capitalisation, the court’s aim is to achieve a clean break between the parties, where possible. The court exercises wide discretion in deciding whether to capitalise maintenance, considering various factors, including:

- The needs and resources of the parties

- The length of the marriage or civil partnership

- The ages and health of the parties

- The earning capacities of the parties

- The financial resources and obligations of the parties

- The standard of living enjoyed during the marriage or partnership

- The conduct of the parties, among other relevant factors

Pros and Cons of Capitalisation

Capitalisation offers several advantages, primarily enabling the parties to achieve a clean break by severing financial ties immediately. This approach eliminates the need for ongoing obligations. However, capitalisation requires accurate predictions of future needs, which can often prove to be inaccurate. The loss of flexibility in adjusting maintenance over time is a notable disadvantage of capitalisation. Despite promoting finality, capitalisation may not be suitable for all situations.

Calculating the Capitalised Sum

The court employs a method known as the Duxbury calculation to determine the capitalised sum for spousal maintenance. This actuarial calculation aims to identify the lump sum required to meet a periodic payment requirement at a fixed rate for the remainder of the recipient's life. The Duxbury tables, integral to this calculation, help ascertain the appropriate level of lump sum by considering the recipient's age (and consequently their life expectancy) and the expected level of net annual income. These tables operate under the assumption that the capital sum will be gradually depleted over time, ideally being exhausted around the time of the recipient's death.

In addition to lifelong spousal maintenance, the Duxbury calculation can be used to determine a capitalised sum for maintenance limited to a specific term. In such cases, the sum may be discounted to reflect the accelerated receipt.

It is crucial to recognise that the Duxbury calculation serves as a tool rather than a strict rule, acting as a starting point or guide. The actual rate of return on the capital by a recipient is inherently uncertain, and the Duxbury calculation may need to be adjusted to reflect various factors such as the length of the marriage, the age of the parties, and potential future capital releases from property sales or other sources. In complex cases, it may be prudent to engage an actuary to prepare a bespoke calculation.

Consideration of a Clean Break

The court has a duty to consider whether a clean break is achievable between the parties. As part of this evaluation, the court assesses whether there are sufficient assets to capitalise a maintenance claim. Additionally, the court has the discretion to determine whether, and to what extent, the payee's existing and potential capital resources should be included in the calculation to establish the appropriate lump sum or other order for capitalising an established maintenance requirement.

Conclusion

Ultimately, capitalisation serves as a tool to achieve the court's primary objective of fostering a clean break, but its applicability must be carefully evaluated on a case-by-case basis to ensure fairness and financial stability for both parties. Through thoughtful application, capitalisation can effectively terminate financial ties, promoting independence and reducing the potential for future disputes over maintenance adjustments.

For further information and advice on this issue, and other family law issues, please contact us for a free initial consultation on 01992 306 616 or 0207 956 2740 or email us.