Financials After Divorce – Duxbury Calculations

What is a Duxbury calculation?

A Duxbury calculation is used to work out an appropriate lump sum for a financially dependent party in the place of periodical payments (spousal maintenance). 

The calculation produces a lump sum which, if invested to achieve capital growth, could be drawn in equal instalments and would last until the end of the recipient’s life.

Where do they come from?

‘Duxbury calculations’ originate from the case of Duxbury v Duxbury Fam 62.

In this case Mr and Mrs Duxbury were married for 22 years. Upon divorce, they were both keen to settle the finances by way of a ‘clean break’ and it was argued that a lump sum financial settlement was the best way to secure this.

Mr Duxbury was the higher earner and therefore it was intended that Mrs Duxbury receive the lump sum settlement.

Mrs Duxbury’s accountant set to work creating a computer programme to calculate how his client could have a lump sum equivalent for the maintenance payments which would last until her death.

The lump sum would therefore have to take into account matters like inflation and the recipient’s life expectancy.

Thereafter, the process involved in working out the lump sum took on the case’s namesake and has been referred to as a Duxbury calculation.

What does the Duxbury calculation consider?

The Duxbury calculation attempts to work out a lump sum that will be used throughout the life of the former spouses and could, in theory, be drawn in equal instalments for the rest of their life.

If the calculation has been made perfectly then there would be nothing left at the exact time of death. The calculation is inevitably based on a number of assumptions as to life expectancy and rates of inflation.

How do I make a Duxbury calculation?

The Duxbury calculation is made by consulting a ‘Duxbury table’.

The Duxbury table has columns along the top setting out the annual net income needs required by the party.

The annual net income needs tend to be calculated by putting together an annual budget. To the left, there are columns setting out the recipient’s current age and sex.

In order to work out the requisite lump sum, all you need to do is trace down the income need column to the correct age and sex and the figure you ‘land’ on is the equivalent amount for the lump sum.

Where I can find the Duxbury table?

The Duxbury tables are contained within the Family Law: At a Glance volumes.

Is the Duxbury calculation for me?

The Duxbury method works well where both parties want a ‘clean break’ i.e. they wish to completely terminate all obligations to each other and most importantly, where there are the means to settle the finances by way of lump sum settlement.

As attractive as lump sums are, it is simply not possible to settle the finances by way of lump sum if there is insufficient capital.

The Duxbury calculations can prove a useful negotiation tool if couples are trying to work out a settlement as they provide a good point of reference for appropriate lump sums.

The courts will consider fairness in all cases and will be live to issues where the Duxbury calculation can achieve too generous an award for a young recipient who enjoyed a short marriage in comparison to an older recipient who enjoyed a long marriage.

The court exercises a narrow discretion when considering whether a case should depart from the Duxbury tables when calculating a lump sum award.

Although using the Duxbury table is relatively straightforward, it is worth remembering that no case is the same and there may be circumstances that render a case unsuitable for a Duxbury calculation.

Duxbury Tables are the industry-standard mechanism for capitalising an income stream on divorce.

I will illustrate with an example…

“Mr Smith, aged 55, and Mrs Smith, aged 52 are to divorce. The decision is made that, as the main ‘breadwinner’, Mr Smith is to provide Mrs Smith with £50,000pa, net of taxation, until the day that she dies.”

Such a responsibility for an annual payment  financially ‘ties’ Mr and Mrs Brown for, (on actuarial expectations), upwards of 30 years.

Both parties would prefer a ‘clean break’ in order that they can move on with their lives, and so a ‘capitalised’ settlement is discussed.

The Duxbury Tables are consulted, and they give a figure of £967,000.

If Mr Brown pays that sum to Mrs Brown it is considered that she can, realistically, expect to achieve £50,000pa, net of taxation, increasing with inflation, until the day she dies.

It is easy to simply ‘accept’ such calculations as “industry standard” without questioning them. 

However: 

  • Duxbury assumes a uniform income yield on investments of 3%pa, and capital growth of 3.75%pa. A total return of 6.75%pa is, according to Duxbury, achievable “even with a cautious investment strategy”. The Financial Conduct Authority’s own ‘mid-rate’ for Medium Risk investments is 5%pa.
  • Duxbury makes no allowance at all for any costs applicable on investments. Typically headline costs of running invested funds are as below:
    • Managing one’s own money = c1.3%pa
    • St. James’s Place = c1.9%pa
    • Discretionary Fund Management = c2.5%pa
  • Duxbury assumes that returns are ‘uniform’, that is to say the exact same each and every year. History may be no guarantee of the future, but common logic and experience dictates that some years are good, and others are bad.

Duxbury calculations assume Income Tax applies on the yield of the capitalised holdings, and Capital Gains Tax on the realised gains.

As an example, if planning efficiently, one can deliberately target the following allowances and exemptions:

  • The Personal Allowance – the first £11,850 (2018 rates) of one’s income is taxed at 0%.
  • The Capital Gains Tax Exemption – the first £11,700 (2018 rates) of gains one realises in a tax year is taxed at 0%.
  • The Dividend Allowance – the first £2,000 (2018 rates) of dividends one receives in a tax year are taxed at 0%.
  • The Personal Savings Allowance – Basic Rate taxpayers can earn up to £1,000 (2018 rates) in savings income tax free.

Even after these allowances there are other HMRC-endorsed, investment structures that permit either tax-deferral, or tax reduction.

Realisation of a ‘sensible’ income from a capitalised sum should generally incur only a meagre tax liability if one plans well.

If seeking a calculation you should seek specialist advice from a Financial Planner and obtain financial projections that are market driven.

In all matters of family law, it is always wise to speak with a lawyer and take advice on the options available to you and the fairness of any potential financial settlement.

If you would like to know more about the issues covered in this article, contact me for a free consultation. 

 Call 01207.655178 today.

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