Natasha Methven explores the use of the Duxbury calculation in financial remedy cases and questions whether it is still fit for purpose.
When navigating the complexities of financial remedy cases (the legal process which decides how assets are divided after a divorce or civil partnership dissolution), the Duxbury calculation has long been regarded as the key formula to calculate a capitalised payment, which is a lump sum resulting in the recipient receiving an income for life, instead of monthly maintenance.
The calculation considers how long the receiving spouse is expected to live based on actuarial tables based on age and gender. The table changes each year due to changes in the life expectancy data and tax rates. However, it is important to note that the core assumptions underlying the table are considered optimistic by many investment professionals, and the capital may not be sufficient to last for life.
The calculation arose following a case from 1990 called Duxbury v Duxbury, where the Wife’s accountant created a formula to calculate the lump sum that she would require to meet her income needs for life.
The calculation has been widely used in cases where a Recipient’s maintenance claim is capitalised to produce a clean break between the parties (as an alternative to monthly maintenance payments), which is always the Court’s aim if it is possible and affordable.
What assumptions is the calculation based on?
The Duxbury formula is based on a number of assumptions, including:
- The actuarial life expectancy of the recipient;
- A uniform income yield of 3% per annum (1.5% in the first year);
- A uniform rate of capital growth of 3.75% per annum;
- Inflation of 3% p.a., and
- The recipient is in receipt of a UK state pension.
What are the limitations of adopting Duxbury in 2024?
The Duxbury calculation is intended to achieve fairness between the parties. However, it is impossible to ensure absolute fairness because of the future uncertainties. This is perhaps a trade-off for receiving and being able to invest the income and one lump sum, as opposed to periodical payments over a lifetime.
For example, a party will benefit from receiving a capitalised payment if they remarry or die before the actuarial age. They also avoid the risks of the other party applying to vary the maintenance during the periodical payments term.
However, if the recipient lives longer than the actuarial age, it can be a real issue as the fund is designed to be exhausted at the actuarial life expectancy age. In reality, we now see people living well into their 90s, and even to 100. A party’s capital can therefore be depleted, and they will be unable to meet their needs, at an age where there is little recourse to find alternative sources of income.
There are also many variables which means that the assumptions can be not reflective of the economic reality. For example, inflation has fallen in the past year from almost 10% per annum to 3.8% per annum. In addition, the recent Covid-19 pandemic has shown that it is impossible to predict what may happen which may affect the fairness of the original award.
What are the alternatives?
The Courts recognise the limitations of Duxbury, and it has been described as a “tool not a rule”.
There are calls for a review of the Duxbury model, and perhaps a solution is that there are a range of tables produced that can be applied to different circumstances, such as the recipient’s approach to investment risk. The current model assumes that investment returns are high, when in fact this is not a guarantee, especially if a recipient is not financially savvy. The parties may wish to receive investment advice and assistance, but there are no allowances for the cost of investing.
A committee known as the Duxbury Working Party Redux (“DWPR”) is formally reviewing the Duxbury methodology. It is not yet known if this will bring about significant changes and deal with the limitations.
In the meantime, an alternative that parties are exploring is cash flow planning with investment firms. However, concerns are raised often by the other party that the cash flow planning and analysis is biased to inflate the recipient’s requirement.
Although solicitors can offer some general guidance on aspects of finance in relation to divorce, we are not authorised to give specific financial advice. In these circumstances, we would involve other professionals such as accountants or an Independent Financial Adviser (IFAs).
Julian Whight, Financial Planner at Evelyn Partners, says as follows:
“Cashflow software can be far more flexible than Duxbury tables, as it enables quick answers to ‘what if’ questions that arise during negotiations, and can allow for case specific considerations, such as attitude to risk and ability to take risk, temporary or variable maintenance payments, a future sale of the matrimonial home and downsizing, anticipated gifts or capital expenses, anticipated inheritances, and other sources of income including pensions.
For fairness, consistency, and credibility, it is fundamental for financial planners who specialise in this area of guidance, to utilise the same assumptions and methodology as they would when advising any other client of their firm, regardless of whether they are acting as a financial neutral, or for one party. Many firms will have a central team that sets the assumptions for use by all practitioners, to ensure consistency of approach for all clients.”
In conclusion, dividing assets on divorce fairly and ensuring both parties’ income needs are met is complex and although formulas such as Duxbury are intended to provide useful guidance, they are a “tool not a rule”. It is therefore necessary for solicitors to carefully consider the facts of each client’s case alongside the limitations of the Duxbury formula, and where appropriate, work with IFAs to produce a cash flow analysis to ensure that their client’s needs are met.
If we can help you navigate the financial uncertainties of divorce, please contact me, Natasha Methven, or any member of the LMP team.
