This is the second in our series of articles about the ‘section 25 factors’ which are set out in section 2 of the MCA1973. Please refer to the first article in this series for a detailed analysis of the first of these factors (section 2(a) MCA 1973).
This article will focus on factors (b) to (e):
(b) the financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the foreseeable future
At an early stage in any family law process, it is essential to work out the financial needs of each party to the divorce process including the needs of any child under 18 or still in full-time secondary education.
Financial needs include:
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Income needs.
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Capital needs (including housing needs).
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Where there are pensions, how these can be used to assist in meeting longer term financial needs to provide greater financial security.
Early on in any family law process you will usually be asked to gather information to work out your financial needs and resources on divorce. This is known as ‘financial disclosure’ in family law. In some cases, couples wish to limit legal costs as far as possible and may consider that they know everything about each other’s finances and do not see the need to go through the disclosure process. Lawyers cannot advise clients fully where they have not seen financial disclosure and will encourage you to consider carefully whether there should be a financial disclosure process.
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Income needs
These are assessed by completing an income needs schedule. Your lawyer will usually provide you with their own template so that you can provide this information.
There are often two columns; ‘current’ and ‘future’ and the schedule is divided into categories such as ‘housing’ (rent/mortgage, council tax, utilities etc); ‘travel’ (public transport, MOT and service, car tax etc); ‘living expenses’ (usually the biggest section – including food, clothing, leisure activities, house repairs, holidays, Christmas/birthday presents and many other items); children’s expenses (nursery, school fees (if any), hobbies, pocket money etc). These figures are totalled at the end of the form.
It can be difficult to estimate future needs as this requires some ‘crystal ball gazing’ and it can be overwhelming at first to contemplate how your financial situation will be in the future and how you can afford to live separately.
It helps to focus on current needs first and then during the process you have chosen, you will be able to complete the future column as you obtain more information.
The total outgoings will then need to be offset against your total income – to work out your monthly surplus or a shortfall. Completing this schedule will give you a starting point to help in discussions of how each of your income needs and those of the children can be met when you live separately. There may be income from a business, self-employed or employed income, rental income, state benefits, trusts income – it will be important to obtain a clear idea of these resources to see what is available to meet the family’s needs.
You can update your income needs as you go through the process if you need to change any figures or as you work out more clearly your options for the future and the impact of these on your outgoings.
You will be asked to research your earning capacity particularly if there is a shortfall for one of you to see if you can increase your income in the foreseeable future to be able to meet your outgoings.
If one of you has surplus income and the other has a shortfall, the one with the surplus may be asked to provide the other with some income – this is usually for a limited term which varies in each case, to enable the other person to try and increase earnings/income resources to see if they can become financially independent within a set period of time (this is known as ‘spousal maintenance’) – there is no formula for calculating this and it is separate from child support – and based on income needs and resources. There may be other income resources available to either party too such as rental income, or state benefits including child benefit which you may not have been eligible for when you were living together as a couple if you were over the joint income threshold (child support, if it applies in your situation is worked out separately by reference to the online child support calculator).
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Capital/Housing needs
If you are asked to complete a Form E by your lawyer, section 3.2 asks you to estimate your future capital needs and any capital needs for children.
This can include your estimate of the cost of a future home; a replacement car; a contingency fund for emergencies/house repairs. For children, it may be savings for tertiary education, school fees, medical costs. It can be very difficult to simply estimate these and may feel like guesswork.
For housing costs, your lawyers will ask you to obtain information about options for housing (rented or owned) by researching online to find out the range of costs in the area in which you hope to live.
If you hope to remain in your home or buy a new home, you will be asked to research your mortgage capacity (you may be able to do a quick check online, but for a reliable estimate of this you would usually need to ask a mortgage broker or mortgage company to work out your maximum borrowing capacity to see how much capital you would need as a deposit to add to a mortgage or if you can afford to buy the other person out).
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Pensions
The relevance of these will vary widely depending on your age and stage of life and your particular situation.
Over the course of your marriage you may have had several jobs and acquired several pensions. If you have pensions, you will each need to obtain valuations of these. This would enable your lawyer/pensions advisor to review your respective pensions and see if there is a large disparity in the overall value for each of you.
The starting point for sharing pensions is to equalise these between you so you leave the marriage on the same footing in relation to pensions by either a pension sharing order being made in favour of the person with the smaller pension, or a lump sum being paid by the person with the larger pension to compensate the other for having a smaller pension. However with shorter marriages or marriages later in life, there may be reasons why either of you would not consider it fair to share pensions equally and these issues can be discussed and negotiated.
Pensions are often complex and you may need a pensions on divorce expert (PODE) or an actuary to review pensions and report as to sharing these fairly.
This factor also refers to financial obligations and responsibilities. Where you have children, you will be legally obliged to each provide financial support them whilst they are under 18 or remain in full time secondary education and you can find out more about this within the resources given below. You may have dependent children from earlier relationships or ex-partners where you have pre-existing legal obligations to support them financially as well. Providing information about any dependants and your financial responsibilities to them will be part of the financial disclosure process and relevant to working out your income needs.
(c) the standard of living enjoyed by the family before the breakdown of the marriage.
The standard of living (or lifestyle) that a couple had together is a relevant consideration when looking at finances on divorce. Although it may well not be possible to continue with that lifestyle when living separately, it would not be considered fair for a divorce to lead to a “sudden and dramatic disparity” in your lifestyles.
Where you have dependent children, you may share their care equally or one of you may provide their main home and they will spend time with the other of you at your home. In an ideal world, you would both be able to have the same sized home in a similar area of a similar standard and this is likely to make the transition to 2 homes easier for the children so they do not feel that one of you is living in a much lower standard of home than the other. However, it is often simply not possible to afford two homes of the same size and standard immediately and it may be that one of you will stay in the family home and the other will find a smaller rented home but that you will agree that this is for a limited time to e.g. let the children adjust to the change/complete GCSEs/A levels or a number of other time limits you may both agree or negotiate. You may agree at a future date that the person who moves out will receive their share of the equity in the family home at a specified future date to preserve the home for the children whilst they are young.
The first priority overall is to meet your respective reasonable needs and those of the children, and if those can be met and there are surplus funds available to either of you it may be that there would be a ‘departure from equality’ and a possibility that your pre-divorce lifestyles can be maintained.
People have different spending habits and that can often have been a contributing factor to the separation and so it is important to check that income needs are reasonable and fairly balanced for each person even if each has different spending priorities so that each has the opportunity for as comparable a standard of living to each other on divorce as possible.
Leaving the marriage with an unbalanced standard of living is likely to have a significant impact on children and their relationship with each parent – they may worry about one parent having less financial resources than the other or be less inclined to stay with a parent in a small flat if the other is living in a large house. The parent with lower earning capacity and capital resources will be likely to need financial support from the other for a while to make the transition to independence.
(d) the age of each party to the marriage and the duration of the marriage.
There is no set definition of what is a long or short marriage, and this is an area which is often debated in cases which come before the Court. In practical terms if the marriage is less than 3 years long it may be considered short but not automatically and it will depend on whether there are children whose needs must be considered as a priority.
The court has a duty (section 25A(1) MCA 1973) to consider whether a ‘clean break’ order should be made in all cases regardless of how long the marriage has been. It is more likely that where a couple do not have dependent children and the marriage has been ‘short’ that the Court would consider a clean break with no ongoing financial ties to be fair. To obtain a clean break, you would still be able to negotiate sharing any capital resources including property fairly and potentially considering any pension sharing.
After a longer marriage, when couples may be closer to retirement, there may be a big disparity in earning capacity, incomes and pensions if one parent has sacrificed their career for example to provide the main childcare to enable the other to pursue their career to build finances for the family and this will usually have been a mutual decision. The longer the marriage and greater the disparity, the more likely it is that there would need to be consideration of spousal maintenance if one person cannot meet their income and capital needs independently on separation.
Where one person has not worked for many years because of decisions made together to allocate family responsibilities, it is often very challenging for that person to be able to restart on a career ladder and they may need to retrain and/or take lower remunerated work than their original qualifications would have led them to expect until they gain up to date experience. They may have a few years where they will need ongoing or additional financial support from the higher earning person, possibly until they are able to access their pensions income. The alternative is to capitalise spousal maintenance to achieve a clean break so that there is not the ongoing tie of paying and receiving a monthly payment but this will depend on whether there are funds available to pay out a lump sum instead of ongoing maintenance in addition to meeting both people’s housing needs.
Where couples marry later in life and may have contributed to their pensions considerably before meeting, it will be necessary to consider whether it would be fair for them to have to share all their pensions or whether to look at the pension that has accrued during the marriage only which may be relatively short. A pensions expert is likely to be needed to consider the options and relevant calculations.
(e) any physical or mental disability of either of the parties to the marriage.
The extent to which this is likely to have an impact on any financial outcome on divorce will vary depending on the nature and degree of any such disability in terms of how it will affect a person’s ability to earn an income on separation; the support and care needs they may have to live their daily life; their capacity to live independently and any prognosis as to whether this is a long-term condition or not – medical information may be needed to make decisions.
In some cases, one person may have been the primary carer for the other when they were married and on separation it will be necessary to see how this role can be replaced and any costs likely to arise as a result and research as to funding sources that could alleviate worries about how these are to be met where finances are stretched. The person who has been the carer may not have been able to work fully for some time so their financial needs also need to be considered and whether they may need to retrain or need to explore other financial resources that may be available whilst they look for job opportunities.
If one parent is disabled and there are young children, that parent may need added support and financial consideration to be able to share the care of the children in terms of a home which is adapted for their needs if this does not exist already, adapted vehicles, transport. (It is beyond the scope of this article, but where children are disabled and have greater care needs this will also have an impact in most cases on how finances need to be allocated across the family).
Research may be done about other sources of support or income to increase family income resources if there are health or disability factors which will limit or prevent any change in earning capacity over time and also mean that there is no mortgage capacity.
The third and final article in this series will cover the remaining section 25 factors. For more information or to arrange a confidential discussion please do not hesitate to contact us.
Sarah-Jane Riddell is a Senior Associate, Collaborative Lawyer & Mediator in our Brighton office.
