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PENSIONS CLAIMS IN DIVORCES - NEW PENSION-SHARING LAW

It has been possible in Scotland for some years now to make claims against the capital value of pensions. Sometimes however it has been difficult to make practical arrangements for the actual payment. Accordingly the Government has introduced a new mechanism for dealing with this. This is set out in the Welfare Reform and Pensions Act 1999, which came into force on 1 December 2000.

This Act does not create new financial claims in a divorce. It simply provides for a new mechanism for the payment of a claim which is based on the value of pensions. The principle of making a claim against the value of pensions has been with us since the Family Law (Scotland) Act 1985.

In addition the new Act does not alter the basis of valuing pensions claims. In most cases at present valuation is based on the cash equivalent transfer value, and this will not change. In other cases it is necessary to obtain a full actuarial value, and this will not change either.

Sometimes when the value of all of the assets is calculated, there is enough value in the other assets apart from the pension to allow a capital settlement to be made straight away. In other cases however there is insufficient value in the other assets to allow a complete settlement to be paid over there and then. It can then be difficult to make sure the spouse who has no pension rights receives the full capital entitlement. Until now the courts have had to try and use existing legislation to ensure that a full payment is received, for example by “earmarking” part of the pension to be paid when the lump sum is paid out on retirement. Sometimes however the spouse who is due to make the payment can transfer the pension, or may die and the other spouse does not receive the full entitlement.

The new regulations will result in the courts ordering the existing pension company to separate the amount of capital which is due to be paid to the other spouse and transfer it into a new pension fund in the other spouse’s name. That transferred fund will then be treated like an independent pension, though on the same terms and conditions as the original pension.

Take a typical illustration, where the pension holder is the husband. At the date of valuation of pension for divorce purposes, let us say that the pension fund with Big Pensions Ltd is worth £100,000 and other assets were worth £200,000. The wife would be due to receive one-half of the total, i.e. £150,000. She could receive this out of the other assets, so that the husband’s pension remains untouched.

However, if the only asset was simply the pension, then there are no other assets which can be used to pay her the £50,000 to which she is entitled. The pension cannot of course be cashed in or surrendered, and let us suppose that the husband cannot raise a loan to pay out the £50,000. In this case the courts can now order Big Pensions Ltd to transfer £50,000 from the husband’s pension fund and set up an entirely separate fund for the wife in her own name with that £50,000. At the point in time when the husband is entitled to start receiving his pension, then so also will the wife start to receive her pension. In the meantime her pension fund will continue to grow in the normal manner.