The minimum contributions that employers and staff are to pay into automatic enrolment workplace pensions increased from 6 April 2019 (this is not applicable to defined benefit pension schemes). From that date, the minimum employer contribution increased to 3% (it was previously 2%) and the minimum employee contribution increased to 5% (it was 3% previously).
Pensions are relevant to divorce law, in that when a married couple separate, their respective pension entitlements are taken into account in calculating the total matrimonial 'pot' to be shared on divorce.
What is in the matrimonial 'pot'?
All of the assets and liabilities built up during the marriage are 'matrimonial' and are taken in to account in determining the value of the matrimonial 'pot' and how it is to be divided on divorce. The exception to this is gifts received from a third party during the marriage, or inheritance. If, however the gift or inheritance is converted into another asset during the marriage (for instance if it is used to purchase a house) that asset is matrimonial property. In those circumstances, an argument can be advanced that account ought to be taken of the fact that the asset derived from non- matrimonial funds (the gift or inheritance).
Understanding pensions in divorce settlements
In calculating the value of the matrimonial 'pot', the capital value of the parties' pensions is also taken into account- this is generally known as the 'cash equivalent transfer value'. The cash equivalent transfer value can be obtained by the pension provider. If the pension began prior to the marriage it is necessary to apportion the value to show the value for the period of marriage only. The calculation used to determine this is set out in Regulation 4 of The Divorce etc (Pensions) (Scotland) Regulations 2000. Following the case of McDonald v McDonald [2017] UKSC 52, 2017 SLT 837, even if a spouse stops contributing to a pension during the marriage, the period of non-active or deferred membership is taken into account- albeit this may be subject to a 'source of funds' argument.
Is my pension protected in a divorce?
In calculating the value of the matrimonial 'pot', the capital value of the parties’ pensions is taken into account-. Pensions are not therefore protected in a divorce, unless for instance, a prenuptial agreement has been put in place specifically excluding pension provision from any future divorce.
The only way to ensure that the value (or apportioned value) of a pension is protected on divorce is to enter into a prenuptial or postnuptial agreement which is discussed further below.
Is it possible to share pension rights?
Under Scots Law, it is possible for the court to order, or for the parties to enter into an agreement, providing that a pension is to be shared on divorce, as part of overall settlement. This involves pension being transferred from the scheme of one spouse to a separate scheme in the name of the other spouse. Pension sharing can only take effect once divorce has been granted.
How pensions are divided in divorce
In a negotiated settlement, there is no obligation on spouses to receive or provide a pension share as part of the division of the matrimonial property. If, however, there is to be a pension share (whether court ordered or otherwise) there is no set proportion that requires to be transferred, and this could be up to 100%, although this would be relatively unusual. Ordinarily the pension share to be transferred is expressed as a set figure that has been calculated as part of the overall division of the matrimonial property.
If the parties remarry, the pension they receive by way of a pension share will not be exempt from any future divorce and will likely be taken into account. In order to safeguard against this, a prenuptial agreement can be entered into. This can ringfence certain assets (including pensions) and anything deriving from those assets in the event of a subsequent divorce. This can avoid, for instance, a pension forming part of the matrimonial property to be divided on divorce. If parties are already married, a post nuptial agreement can be entered into to provide this protection. Such agreements should be considered as part of an individual’s financial planning prior to entering in a marriage.
Do I get half of my spouse’s pension if I divorce them?
In Scotland, in calculating the matrimonial ‘pot’ to be divided on divorce, we look at the assets held by the parties as at the date of separation, both in joint names and in sole names. Valuations of the assets are obtained in order to calculate the total value of the ‘pot’ to be divided between the spouses. The starting point is that each spouse should receive assets equivalent to one half of the value of the matrimonial ‘pot’. If there is any imbalance, this requires to be made up by way, for instance, of a transfer of cash or a pension share. Whilst it may be that a spouse will receive 50% of the other spouse’s pension to address this imbalance, it is not the case that each asset is split 50/50 on divorce.
There can be arguments to deviate from a 50/50 split of the ‘pot’ in certain circumstances.
Financial planning post-divorce
In considering the structure of a divorce settlement, particularly in circumstances where pensions have a high value, it is recommended that advice is sought from a financial advisor. There may be certain advantages to structuring settlement in a particular way. A financial advisor can also assist in assessing financial health after divorce, including pension advice. It is important that financial plans and documents are updated to reflect the new circumstances, whether that be on divorce or remarriage.
Learn more about how Brodies’ divorce lawyers advises on pension sharing and financial arrangements during separation.
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