Working out a client’s income needs during a divorce

During divorce proceedings both spouses will be required to collate their financial information, usually setting it out in a  prescribed Court document, known as a Form E, and exchanging this information (known as financial disclosure)  with each other and their professional advisers so that everyone has a complete picture of the financial circumstances. Only at this point can negotiations for a financial settlement generally begin. In some casesthe assistance of a financial advisor is highly beneficial with the preparation of a Form E.

One element of financial  disclosure includes preparing an Income Needs Schedule, often called aSchedule of Outgoings . The schedule outlines an individual’s current and anticipated future outgoings.  It is a short but significant document because it can determine whether or not one of the parties should receive maintenance from their former spouse.  It is essential to ensure that the schedule of outgoings is comprehensive, includes everything relevant to a person’s  expenditure and is realistic. Only when this schedule is completed can an assessment of spending needs be undertaken and maintenance be considered.

Many people find the schedule tricky to complete particularly when one spouse has had more involvement with the family finances than the other.  The imbalance can leave one spouse ill prepared to appreciate the true extent of what their monthly spending could be once living separately.  This often leads to people either underestimating or overestimating their spending needs both of which can cause challenges down the line.  For example,  the Court will likely  take a dim view of exaggerated spending requirements but I have also seen problems when the more “powerful” spouse takes advantage by underplaying the amount of income his former partner will need to maintain a reasonable lifestyle.

I recommend that a client follows the following tips to tackle the tricky issue of completing the schedule.  First, the client must utilise any template provided by their solicitor which should provide separate headings and spaces for all anticipated outgoings.  This will involve thoroughly reviewing the last twelve months of bank or credit card statements to identify regular spending habits and all standing orders and direct debits.

I am often surprised by items of expenditure that are  regularly overlooked or forgotten. For example, clients often forget about streaming services like Netflix or Disney, and cloud storage as well as subscription Apps held on smartphones such as Calm and Duolingo.  Some of these payments may be made annually. Medical prescriptions and pet expenses including stabling costs for horses, vets bills and monthly pet plan fees are other examples of expenditure that are often overlooked and regularly I see food shopping massively underestimated especially where there are children in the household!   Looking ahead, expenditure  on children will inevitably increase as they get older when breakfast clubs, holiday clubs, sporting or musical activities,  additional tutoring and driving lessons are required.

Regardless of their age, people also need to think about their income needs on retirement.

Understandably, many people find this process overwhelming, and so I often recommend that a person outsources the process to an accountant, IFA or even a specialist independent company.  They will work out a person’s expenditure in a bespoke way taking into account where they live and regional differences in living costs often using bespoke software. A good example of this is “bdgt”, a recently launched tool that uses Open Banking to automatically categorise spending, giving a user friendly breakdown of outgoings over time and a helpful forward looking budget. By looking ahead at realistic outgoings in this way, we can project income requirements as a person and their children get older and assess their spousal maintenance needs. This leads to the production of a far more accurate schedule of outgoings, thus reducing the possibility of it being challenged.

A good solicitor will be able to be able to recommend companies that provide these services and it is worth bearing in mind that the fee paid will often be a lot less than it would cost to get a solicitor to do the process or, crucially what a client would lose in spousal maintenance if they underestimate their spending needs by overlooking important aspects of expenditure.