5 Key Points when dealing with Pensions on Divorce in Scotland

Pension interests can, collectively, be the highest valued assets that someone owns. Careful consideration must be given to what extent they should be regarded as matrimonial property for divorce and separation purposes. A failure to identify pension interests or to correctly apportion a pension value may have drastic long term implications for either spouse on divorce.

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Pension valuations are not usually at the forefront of people's mind at the outset of a separation. However, careful attention must be given to considering to what extent pension interests should be regarded as matrimonial property for divorce purposes.

Addressing pensions in the context of a separation and divorce can be a tricky process. A failure to identify pension interests or to correctly apportion a pension value may have drastic long term implications for either spouse on divorce. For example it may result in a pension share being agreed which is excessive or, if pensions are simply disregarded, it may result in one spouse accepting a hugely unfair division of matrimonial property.

Although pension interests can be significant in value, they do not necessarily need to be affected by a divorce. However, this is largely dependent upon the extent of any disparity between the net matrimonial property held by both parties and the resources that may be available to achieve an overall settlement.

Where disposable resources are limited, a pension share can offer a helpful method to achieving fair sharing without having to secure additional borrowing or suffering financial strain. A reduction of a spouse’s pension policy may however detrimentally affect the transferring spouse’s pension available upon retirement. Therefore financial advice should be obtained prior to agreeing to a pension share to consider the long term implications on retirement.

Here we look at five key issues when dealing with pension value on divorce.

In all cases, advice should be taken from an experienced Family Law solicitor in the event of a separation to ensure that a fair settlement is achieved.

Pensions and Divorce – The Basics

1. What is a Pension?

A pension is a long term investment. Contributions are usually made to a pension fund during the period of an individual's working life. Once an individual reaches the retirement age applicable to the pension fund, the fund will then begin providing the individual with periodical payments as income to support themselves following retirement when they are no longer receiving a salary. For most individuals their pension interests can, collectively, be the highest valued assets that they own.

2. What is Matrimonial Property

Matrimonial property consists of all property belonging to the parties or either of them (in sole or joint names) at the relevant date. The relevant date is the date of separation or the date a divorce action was served on the other party. Exceptions to what is considered to be matrimonial property apply where property was acquired by way of a gift from a third party or inherited. Property acquired before marriage is not usually regarded as matrimonial property, unless it was purchased with the intention of being used as a family home or used as household furniture for the family home.

In Scotland, the Family Law (Sc) Act 1985 provides that the ‘net value of matrimonial property’ should be shared fairly between the parties. To determine the net value, the total value of all matrimonial debts needs to be deducted from the total value of all matrimonial assets. A fair division of the net value of matrimonial property shall be deemed to be shared fairly, when shared equally or in such other proportions as are justified by special circumstances.  

3. Working out how much of a Pension is Matrimonial Property

Pensions are a unique form of matrimonial property. Like other items of matrimonial property, all pension interests held by the parties would need to be identified and valued as at the relevant date. Once identified, in order to obtain a valuation a request should be made to the pension provider seeking a Cash Equivalent Value (CEV) as at the relevant date. It should be noted that some pension providers charge a fee for providing a pension valuation. Enquiries should be made prior to a request as the costs can vary significantly.

Once a CEV is obtained, it is then necessary to determine how much of the pension valuation falls within the period of marriage. The reason for doing so is due to the fact that individuals may have contributed to their pension for many years prior to entering marriage. It would be unfair to include pre-marriage pension contributions as matrimonial property. The law sets out a calculation for determining what proportion of a CEV is to be regarded as matrimonial property. This is known as an ‘Apportionment’ calculation.

4. Importance of type of Pension Membership

At the relevant date, an individual may be an active member, deferred member or pensioner member of a pension policy. The particular type of membership that an individual is, during the period of marriage, can have a considerable effect upon the apportionment calculation of a pension valuation. This was addressed in the case of McDonald v McDonald, which was heard by the Inner House of the Court of Session following an appeal from the Sheriff Court.

The focus of the case related to the question upon whether the type of member an individual was (active, deferred or pensioner) at the relevant date, should have any effect upon the apportionment calculation. The point contested was whether membership should be restricted to the period of active membership alone or all types of membership. The Sheriff at first instance decided that the period of ‘active’ membership is the only period that should be included within the apportionment calculation. Therefore if an individual ceased contributing (Deferred Member) or retired (Pensioner Member) during the period of marriage, it is only the period from the date of marriage until the date pension contributions ceased or the individual retired that would be included within the apportionment calculation. This is due to the fact that this period is the only period that an individual has actively contributed to the pension. The case was appealed to the Inner House of the Court of Session where the appeal was refused and the Court upheld the Sheriff’s decision.

5. Pension Sharing

It should be remembered that pensions are usually one of a number of assets which fall within the pot of matrimonial property for division on divorce. If one spouse has greater proportion of the net value of matrimonial property post separation, in order to give effect to fair sharing, a balancing payment may be due by that spouse to the other. Such a balancing payment can be effected by way of a capital sum, transfers of property, periodical allowance or a pension share.

A pension share involves a specified sum being removed from one spouse’s pension and credited to a pension policy for the other spouse. A Pension Share can be implemented by way of a Qualifying Agreement which can be included within a formal Minute of Agreement (Separation Agreement) or a Court Order.

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