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Insights - 11/04/2022

Spousal Maintenance and Capitalisation

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Stephanie Calthrop-Owen, Head of our Family Law team has answered some of the most frequently asked questions in relation to spousal maintenance and capitalisation. She also looks into the nature of spousal maintenance and impact of capitalising it, the pros and cons, impact on parenting and background law.

What is spousal maintenance?

Spousal maintenance is the name given to payments made by a former spouse to a spouse following their divorce. It is also known as “periodical payments” and it is usually paid on a monthly basis, often by standing order. Such payments will be agreed between the parties or ordered by the courts where one spouse cannot get by without financial support from the other, and the other can afford it.

Spousal maintenance orders can be made for life (which is quite rare these days) or for a limited period of time, typical examples of which being to allow the recipient time in which to transition to financial independence, or until the children are of an age when they might attend school or university, leaving the recipient more opportunity to enhance their own income.

In England and Wales, spousal maintenance automatically ends on the remarriage of the recipient.

For the period in which it is paid, spousal maintenance is always variable, depending on the circumstances of the payer and the payee.

Question: I am getting a divorce and want to avoid spousal maintenance. Can I get a Clean Break?

The answer is very often, Yes.

Indeed, in England and Wales our family courts are under a specific duty to try to achieve a clean break wherever possible. And this applies not just at the time of the divorce: it can be months or years afterwards that courts are asked to look at it.

Often maintenance is a necessary part of overall agreement at the time of the divorce, as that’s all the parties can afford. However, people’s circumstances change as time goes by and maintenance can often be capitalised if one party receives a lump sum payment on redundancy, retirement, inheritance or some such event. If a Clean Break cannot be achieved on divorce, it can be bought then. This is a vastly under-used option, well worth bearing in mind if you are paying or receiving maintenance now.

But of course, it can be complex.

Question: How does a court decide maintenance claims and how to capitalise them?

First, the court must assess the receiving party’s basic financial needs and the paying party’s ability to meet those needs.

Our courts take into account earning capacity as well as earnings, and judges will expect both parties to maximise their incomes. They also look at finances generally, their ages, disabilities, obligations to support dependents, and so on. Much will depend on the parties’ lifestyle during marriage, the needs of their children, and anticipated future finances.

It’s a complicated legal issue and incredibly subjective: fair maintenance levels on divorcing a billionaire would look nothing like fair maintenance on divorcing a suburban spouse.

Once a level of maintenance has been determined (or is already in payment), the court then considers capitalisation based on how much maintenance is payable and for how long, and availability of assets to pay it off.  Reference is made  to a standard tool used by family lawyers known as the Duxbury Tables – actuarial tables integrating many assumptions, including ages and life expectancy. These tables show how much is needed by way of lump sum in place of ongoing maintenance at various levels, assuming maintenance is payable for life (which, as already noted, is quite rare nowadays).

Other issues are also taken into account, such as whether and when pensions will become payable, housing needs potentially reducing when children attain adulthood, and so on. All these matters are taken in the round, to come up with a fair solution tailored to each case.

Input from independent financial advisors can put you into a better position to consider your future financial needs, and what level of capitalisation you might be prepared to accept.

Most capitalisations occur at the time of the divorce, or where a maintenance payer is approaching retirement, or when one of the parties receives an inheritance or some such windfall.

Parties will usually reach amicable agreement and lawyers can formalise things by way of a consent order, for the court to consider and approve. If approved, it becomes binding. Be warned however: without a court order it is not final or binding.

Where agreement cannot be reached between the parties, there are a wide array of dispute resolution forums available these days – it need not be court, if you want to try a better way. All good family solicitors will talk to you about the many alternatives now available, and how best to avoid court.

Pros of Capitalisation

1. Get rid of the irritation factor:

      • Paying a lump sum rather than the drip drip drip of maintenance is usually preferable to both parties: a clean break brings financial freedom from one another.
      • Payers no longer see their hard-earned cash disappear to “the ex” each month, and payees no longer fear that next month’s payment might not materialise. It brings certainty and enables both to move on with their lives independently.

 

2. New Partners and freedom to start again:

      • Maintenance does not automatically end on cohabitation. However, a settled, long-term cohabitation might be viewed as sufficient for courts to terminate it, or at least pause or reduce payments. This blocks parties from moving on to new relationships: they fear losing the maintenance on which they depend. & at the same time it disincentivises payers from maximising their careers and earning prospects, as they fear they will only have to give it away.
      • For both parties, there is ongoing fear of maintenance increases and reductions.

3. Better Co-Parenting:

      • The ongoing monitoring of the other party’s finances and relationships often spills over into arrangements for care of their children. Bringing an end to maintenance often removes tensions and makes better parents of both parties.

4. Endless litigation:

      • It is quite common for variation applications to be fought rather more bitterly than the original proceedings. Costs can quickly mount and relationships suffer. Capitalising maintenance extinguishes further claims or fear of claims, and the parties can move on.

Cons of Capitalisation

1. Affordability of a Clean Break?

      • Capitalisation is only possible where there’s enough money available to enable a large lump sum pay-off after housing needs are covered. Not all couples have sufficient wealth for this.

2. Its a gamble!

      • Maintenance is versatile and can adapt to changes in circumstances, but lump sums are one-off. So, for a maintenance payer who loses his/her job or finds out that the payee has inherited a significant sum or started cohabiting, there’s an opportunity to reduce or even try to end the maintenance. That opportunity might have been lost if it was already capitalised.
      • The reverse is also true:: if a payee finds out that the payer’s finances have dramatically improved, a payee may want to try to increase the payments (especially if their own finances are under strain).   If you have already capitalised, it’s generally too late.
      • Ultimately, capitalisation is a gamble.  You may subsequently feel you’ve settled for too much or too little, and there’s usually nothing you can do about it.

3. Irresponsible spending and Third Parties:

        • Some spouses are not used to handling money, and a “windfall” lump sum might disappear all too quickly! In cases where there are children, responsibly minded payers sometimes prefer not to risk a one-off lump sum capitalisation.
        • Concerns as to payment of a large lump sum can be amplified where new relationships appear to have been formed, particularly if there is concern that new partner is financially motivated or manipulative.

Child Maintenance and Capitalisation

It is important to note that there is technically no power for a court to capitalise child maintenance. Finances for children are a different issue altogether, with many interesting and varied legal powers available to ensure the children are properly provided for throughout their minority.

At Morr & Co LLP, we give in depth practical advice tailored to your individual circumstances, helping you understand your options before you make any decisions.

If you have any further questions relating to the above contact a member of our family team either on 01737 854 500 or [email protected].  


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