The Importance of Claiming Pension Rights on Divorce in Scotland

Beware of Waiving your Claim

The  starting point in Scots Law is that  “matrimonial property” is  defined by s.10 of the Family Law (Scotland) Act 1985. In every case, the date of the separation needs to be identified and is know as the “relevant date” when the assets and liabilities owned at the end of the marriage  are valued and the “net pot” available for division is worked out.  S 10 (5) b  provides that matrimonial assets include the rights or interests of either party to the marriage : “in any benefits under a pension scheme which either party has or may have, including such benefits payable in respect of the death of either party”

In Scotland,  the Cash Equivalent Transfer Value (CETV) of the pension is used  to determine the value of the pension  which is part of the  matrimonial property. This is the value of the pension that could be transferred out at the date of separation. If the pension is in payment, then we use the Pension Equivalent Transfer Value (PETV). The pension administrators are asked to provide this. In  more complex high value cases  involving pension rights  we also regularly arrange for professional  actuaries to double-check the accuracy of  a CETV or arrange for a full actuarial valuation.

Pension rights are often the most valuable items involved in asset division, but  they can frequently be  overlooked.  Whilst most divorcing couples will naturally focus on physical assets such as the matrimonial home, only a small proportion  will  consider pensions when dividing assets with their partners, and almost 30 per cent  actively waive their rights to their partner’s pension fund.

Anyone waiving their  rights to their spouses’s pension following separation  can end up with a very unfair and unreasonable outcome which can be financially very detrimental to them in the longer term.  We would always recommend a CETV or PETV is obtained so that a fair and reasonable settlement can be achieved taking of all the assets derived from the marriage.  It  is important to understand that taking account of your husband or wife’s  pension does  need to involve  removing  funds from  it by way of a pension share – it is simply a matter of ensuring its value is taken into account in the overall settlement.

If a pension has started  prior to the marriage, then the pre marriage part will be apportioned off so only the pension accrued from date of marriage up until  the “relevant date” will be included in the valuation.  An apportionment calculation will be undertaken to  determine this value.

The  Supreme Court in McDonald v McDonald in 2017  (https://www.supremecourt.uk/cases/docs/uksc-2016-0015-judgment.pdf)  determined that any form of membership during the marriage,  active or otherwise  is part of the valuation. Even the  non-active membership periods where there are no contributions  and only “passive growth” of the fund  fall to be included in the CETV at the relevant date,  which is part of the  total net matrimonial property to be divided.

When it comes to the mechanics of division, the starting point in Scots Law, in accordance with s.9 of the Family Law (Scotland) Act 1985, is that the net matrimonial property will be shared fairly between the parties. In terms of s 10   the default position is that fairly means “equally”.  However, s 10(6), states that   if  there are “special circumstances”, an unequal sharing may be justified. There are several principles within s.9 of the 1985 Act that can be applied.

In the McDonald case above, it was stated by the Court that whilst the non-active membership period was included for valuation purposes, any unfairness this created could  be addressed by the discretion afforded by  s 10(6) at the stage of division.  One of the special circumstances where a departure from equal sharing may be justified is  where  “Funds used to acquire the matrimonial property were not acquired from the income produced or effort expended by the parties  during the marriage” . 

This  provision can be seen to cover a situation  like in the McDonald case, where there had been significant  pension contributions in the period prior to the marriage, followed by significant  non-active membership during the marriage when substantial passive growth occurred largely due to the value of the  the pre-marital fund, which was not from income produced or effort expended during the marriage.

The case of B v B 2012 Fam LR 65  dealt with special circumstances applying to a pension.  The husband in this case had built up pensions prior to the marriage. These were transferred into a personal pension which started during the marriage. Lord Tyre used section 10 (6) to justify the exclusion of part of the value of the new fund which had been accumulated pre-marriage.  

When working out the division of assets,  if CETVs are part of the pot of assets,  are  various possibilities.  One  is to offset the claim you have on the value of another asset i.e. where one party wishes to keep their pension intact, the other party could receive more from the sale proceeds of the  matrimonial home.

A pension share  takes place when a  credit is transferred out of  the pension fund and at the direction of the other party, into a pension  fund of their own. Occasionally a separate pension credit in the name of the transferee can be retained  in the original pension fund post division.   There are advantages and disadvantages to pension shares,  and independent financial advice on the best and most financially advantageous option  should always  be obtained. Whether a pension share is appropriate will depend on the circumstances of each client, and, in particular, their age and asset distribution.

If the pension share has been agreed during negotiations this will be reflected  as part of the terms of  settlement the  in the final  registered Minute of Agreement which will contain a  pension sharing schedule,  setting out the amount to be transferred and the destination of the new fund - which is  sent to the transferor’s  pension administrators for their approval prior to signature. Once divorce is granted the pension share must be intimated to the find managers of the transferor along with the final decree of divorce within 60 days of extract. If the correct procedure is not followed, there is a risk that the pension share cannot be implemented and therefore this is a technical area needing skilled legal advice.

Given that pensions are often the highest-value assets in the matrimonial pot, it is crucial that they are taken into account when considering what amounts to a fair division of assets. Our experienced  and dedicated team of family lawyers at Livingstone Brown  can advise you  on all aspects of pension valuations, actuarial valuations,  apportionment,  special circumstances,    and the optimal approach to pensions in the context of  division of assets,   to ensure you receive a  fair settlement on divorce. We cannot emphasise enough that waiving your rights claim on  the value of pension rights on divorce is likely to be  a very  costly mistake.