Calculating lump sum payments on divorce – the Duxbury Tables
In this guest blog, Chartered Financial Planner Edward Gascoigne examines the assumptions underlying the calculation of lump sum payments made by the Duxbury Tables, the industry standard mechanism for capitalising an income stream on divorce.
“The answer to the ultimate question of life, the universe and everything is 42”, so wrote Douglas Adams in the cult classic The Hitchhiker’s Guide to the Galaxy.
Geeks the world over have spent hours upon hours attempting to derive the deeper meaning of this sentence. Sadly, the truth, as is so often the case, is much more straightforward. “The answer is very simple”, Adams said, “It was a joke. It had to be a number, an ordinary, smallish number, and I chose that one”.
The number 42, however, does indeed carry two greater significances for those of us that call the UK home:
- 42p in the £ is the effective tax rate on incomes between £46,350 and £150,000pa.
- 42% of marriages in England and Wales are expected to end in divorce, according to recent studies and forecasts.
As a Chartered Financial Planner and Fellow of the Personal Finance Society I spend a significant amount of time helping my clients plan tax-efficiently around the former. If we accept that divorce is closer to a ‘toss of a coin’ than a ‘roll of a dice’ then it makes eminent sense to consider some of the possible financial implications at an emotionally-charged, and financially-significant, juncture of one’s life.
Divorce, almost inevitably, involves financial redress or settlement – sometimes through provision of an ongoing income stream, other times through payment of a capitalised figure. Whilst one’s legal representatives will, of course, always work to secure the best outcome possible for their clients, strong financial planning advice should also be considered essential.
In this blog I take a look at the Duxbury Tables – the industry-standard mechanism for capitalising an income stream on divorce. Let’s take it back a step – what does that actually mean? I will illustrate with an example…
“Mr Brown, aged 55, and Mrs Brown, aged 52 are to divorce. The decision is made that, as the main ‘breadwinner’, Mr Brown is to provide Mrs Brown with £50,000pa, net of taxation, until the day that she dies.”
Such a responsibility 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 the magic number is…. £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. Easy, but petrifyingly dangerous. I will, however, highlight the below:
- 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.
There is good news, however. Duxbury, whilst an investment optimist, is no tax-planner! Duxbury calculations assume Income Tax applies on the yield of the capitalised holdings, and Capital Gains Tax on the realised gains. Whilst the UK’s tax system may not be ‘straightforward’, it is very forgiving where one plans intelligently. As an example, if planning efficiently, one can deliberately target the following allowances and exemptions:
- The Personal Allowance – the first £11,850 of one’s income is taxed at 0%.
- The Capital Gains Tax Exemption – the first £11,700 of gains one realises in a tax year is taxed at 0%.
- The Dividend Allowance – the first £2,000 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 in savings income tax free.
Even after these allowances there are multiple, 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.
In summary, there can be no substitute for taking specialist advice from your Financial Planner and by obtaining financial projections that are market driven, you will be able to reality check the Duxbury tables, to ensure that you achieve the financial security you seek.
Edward Gascoigne is a Chartered Financial Planner, and a Fellow of the Personal Finance Society.
His office advises on upwards of £800m of clients’ investments, all of which St. James’s Place (a FTSE 100 company) guarantee to be appropriate for clients. Financial Lifestyle Management separately guarantees any tax-planning fees a client may incur against tax-savings from the advice given.
Contact Edward Gascoigne at T: 020 7710 3485 or E: Edward.Gascoigne@sjpp.co.uk.
 Income tax and Employee’s NIC (as at 21/11/2018).
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