19 December 2017

During a divorce, couples are often surprised to learn that pensions are one of the most valuable assets they own and many have no idea how they are treated on divorce. Often, couples take the approach of ‘you keep yours and I’ll keep mine’, without stopping to think whether that is fair for them.

In Scotland, the law provides that the matrimonial property at the date of separation should be shared fairly between the parties. A fair sharing starts off as an equal sharing, although there are a number of ‘special circumstances’ that may justify the matrimonial property being split unequally.

Pensions are matrimonial property and are therefore due to be split as part of overall settlement on any divorce. This is usually done offsetting against other assets or by way of a Pension Share. A Pension Share involves the transfer of a pension credit out of one fund into a newly set up fund for the spouse as part of an arrangement upon divorce.

Often, someone will have begun their pension before marriage. Where this is the case a legislative formula is applied in order to apportion out the non-matrimonial part of the pension.

Until 2017, it was believed that pensions that were started before marriage, and to which the pension member had stopped making contributions before marriage, would be entirely exempt from the definition of matrimonial property. However, following the landmark Supreme Court decision of McDonald v McDonald, it now seems to be that pre-marriage pensions will fall to be deemed as matrimonial property if the spouse continues to be a member of the scheme.

This is because the McDonald case clarified the legislative formula to make the ‘period of membership’ include all kinds of membership in a pension scheme, including ‘deferred membership’ (when you have stopped making contributions but are not yet drawing down on the pension) and ‘pensioner membership’ (when you have started to receive your pension). This means that much more of your historic pensions will fall to be included for division as matrimonial property.

In some cases, this could be deemed to be unfair. In such cases it would be open for the spouse with the pension in question to argue special circumstances, asking the court to divide the matrimonial property between them unequally.

Arguments would then ensue about “special circumstances” and the courts will have discretion as to whether to exclude that pension or part of it.

This decision could have particularly negative consequences for those entering into second marriages later in life who have built up substantial pension interests before marriage. This makes it even more important for a prenuptial agreement to be entered into that clearly ring fences the pension from claims.

Other pension pitfalls also need to be borne in mind. Prudent financial planning advice often leads to the transfer of pensions funds during marriage, but this can inadvertently lead to the spouses having stronger claims on the “new” pension funds.

This new decision has yet to be tested and as such, family lawyers are in a state of ‘wait and see’, but with Mr and Mrs McDonald’s case now making its’ way back through the Sheriff Court for a final decision, you will want to watch this space.   

Contacts:
Lesley Gordon, Partner lxg@bto.co.uk T: 0131 222 2939 
Beveley Addison, Solicitor bea@bto.co.uk T. 0141 221 8012

Visit our dedicated family law website here: www.btofamilylaw.co.uk