According to the House of Commons report on the rising costs of living in the UK, published 8th February 2022, in December 2021 inflation reached its highest recorded level since 1992. It is hard to ignore the press coverage of the steady rise in food costs, energy and fuel prices. As of February this year, the Bank of England forecasted an increase in inflation to 7% by April 2022.
When dealing with divorce, parties inevitably have to consider the impact of no longer being able to pool their income, and the stark reality of stretching one income to meet the needs of two households. Family judges are often required to resolve disputes over what provision should be made for a spouse whose income simply is not enough to meet their living costs, or the costs of supporting their children. The court does this by making a:
- Spousal maintenance order; and/or depending on the circumstances
- Child maintenance orders.
A judge will consider budgets prepared by both parties and assess what the party seeking spousal maintenance “needs”. The question of “need” is informed by the parties’ available financial resources, their ages, how long they have been married, and their contributions to the marriage. Generally, the judge will refer to the standard of living enjoyed by the parties during the marriage.
Regularly, parties reach an agreement based on a “global” maintenance payment which is aimed at meeting both the needs of the spouse with care of the children, and the children’s own monthly income needs. As with spousal maintenance, the judge will consider the children’s needs, bearing in mind that the welfare of the children will be the priority.
Having then undertaken such a careful analysis, the reality is that the court can only make an order for maintenance based on the circumstances at that time. As starkly evidenced in the open paragraph above, the costs of living can rapidly increase beyond that envisaged by any court, or anticipated by the parties themselves.
The quantum of any maintenance payment cannot be “written in stone”. To avoid the court embarking on a hopelessly complex crystal ball gazing exercise in trying to anticipate any and all future possibilities, a judge can always vary the sum to be paid. Often this request is driven by a change of one party’s circumstances. For example, a loss of employment, or an increase need arising from long term illness.
When the costs of living can change from year to year, how can the court address a change in future grocery prices, energy bills or fuel costs? After all, these are the key drivers in almost everyone’s household spending.
If the duration of a maintenance order is likely to be many years, then the court can make a maintenance order “index linked”. This means the maintenance payments will be automatically varied in line with any increase in the Consumer Prices Index (CPI). The CPI is generally preferred over the Retail Prices Index as CPI does not take into account housing costs. Expressed as a mathematical formula referable to the CPI index published by the Office of National Statistics (ONS) each year, indexation allows for an annual automatic variation of the sum being paid in the hope that this will then keep track with the increase in living costs.
Indexation is an essential tool in ensuring that any maintenance order based on a carefully crafted and assessed budget does not become out-of-date due to the inevitable increase in the costs of living. It allows the court to mitigate the economic uncertainties that can impact on the essential budget items that we all have to pay each year. Importantly, indexation should be included in almost all circumstances where a maintenance order is being contemplated to avoid the value of a much-needed maintenance payment being steadily eroded over time due to changes – gradual or sudden – in the costs of living.
Simon Donald, Partner in the family team at Cripps Pemberton Greenish
One Response
Salaries are not being increased in line with inflation. What happens when meeting the monthly payments order becomes unaffordable?