Imagine a divorce hearing, both parties aged 60, where the following judgment is given: “After dividing the assets appropriately, as I have determined, I find that Mrs X should receive an annual income of £50,000 per annum, after tax, (and after her state pension is taken into account) from Mr X for the remainder of her lifetime. In order to achieve a clean break, I propose to replace this by ordering a capital sum.
My method for doing this already allows for the likely occurrence and timing of both you and your ex-husbands’ deaths, but, in addition, I need to make an allowance for the fact that he may lose his job.
Having ascertained the amount I would grant you if I had ignored this possibility, I award you 60% of this amount”.
Duxbury tables are used extensively by the legal profession to capitalise an order where an ex-husband pays an inflation linked annual amount to his ex-wife – for life.
No-one suggests that some allowance should not be made for husband’s possible job loss. On the other hand, a 40% discount seems a bit heavy. But is it? You may also ask – why do wives, and their legal teams, accept this? The answer is, it is hidden by the information provided (or rather, not provided) with those tables. Although the underlying assumptions for Duxbury are stated, the algorithm used to derive the numbers is not published. Here, it differs from other professional products.
To derive my 40%, I have started with quoted market annuity rates. Some argue that this is not appropriate. I would say that, in a world where capital is no object, it would be the best solution. This is because:
1. Wives would not need to worry about investment risks, and fear running out of money (a very real risk – see the Andrzej Bojarski reference below). Risk of (ex) husband losing job and the risk of investment underperformance are not necessarily correlated.
2. Investments held might boom, and wives become unduly enriched. This could not happen with a pension annuity.
The calculations for my 40% are approximate, and available on request.
However, the main omission of Duxbury is that it addresses the Husband, and NOT the wife (in the usual cases where otherwise the husband would be paying the wife). She might say – OK – so my ex might have been paying me £50,000 – but I cannot take this as guaranteed. So how much should I draw down from my capital sum?
The answer is – whatever you do, don’t assume any level of income is guaranteed – if your fund depletes, you need to live within the income your depleted fund can then generate, and no more.
Duxbury assumes a gross investment return of around 8% per annum (3% income return, reduced in year 1, 3.75% capital gains, then rounded up for, say, 15% tax, so 6.868% net growth). This seems high in today’s financial environment, but there is some justification – in times of recession and uncertainty, returns are low – but employment is less secure.
My working solution to this dilemma is to use a spreadsheet to plot the progress of our lady, assuming she lives to exactly her life expectancy (here, to 87.8 years, from Table 10 of At A Glance).
I have differenced the £10,000 per annum and £60,000 per annum tables, to avoid complications due to state pension adjustment. Red figures show where formulae differ, and are for the convenience of the spreadsheet user.
This pattern might be seen as the “Ideal Duxbury” scenario, where the income “just” persists long enough. Although we seem to fail right at the last minute, this is misleading. I have assumed that the first £50,000 is drawn on day one – it is more likely to be drawn monthly. If I assume that income is taken at the END of the year in question, the final picture is far rosier.
There then appear to be two lessons for “Duxbury Wives” to take from this – first, curtail your spending in the early years if at all possible, and, second, monitor your award and income regularly – at least every year.
On reading the useful blog
– http://www.andrzejbojarski.com/blog/clean-breaks-shouldyou- doubt-the-duxbury-tables the perils are obvious. However, moving away from “safer” investments brings about greater risk of loss of capital – and, as can easily be shown, early falls may “gear up” a more rapid fund depletion. In technical terms, the risk is that wives spend the credit risk premium for the husband job loss built into the otherwise apparently op timistic investment return assumptions.
The other takeaway is that Andrzej shows a single example, which clearly may be atypical. Despite Duxbury rulings being in place for around 25 years, there appears to have never been a forensic study of the adequacy or otherwise of past awards. If that is true, then such a study is long overdue.
For anyone interested, I can supply a spreadsheet similar to the above, age and award specific, in order to assess more accurately a future “Duxbury Position”, and see what experience for that case shows with regard to future drawdown scope.