Section 10(1) of the Family Law (Scotland) Act 1985 (“FLSA 85”) provides that the net value of the matrimonial property shall be shared equally or in such other proportions as are justified by special circumstances. Examples of special circumstances are set out in Section 10(6) of the FLSA 85.
In McDonald v McDonald [2017] UKSC 52 the Supreme Court ruled that the proportion of the pension to be treated as matrimonial under Section 10(5) of FLSA 85 and as set out in The Divorce etc (Pensions)(Scotland) Regulations 2000 is to be calculated as:
A x B/C
Where:
- A is the CETV at the relevant date.
- B is the period of C which falls within the marriage at the Relevant Date.
- C is the total membership in the scheme (whether it be active, deferred or pensioner membership).
This can lead to unfair outcomes. For example, an individual may have a pension built up entirely from contributions made prior to the marriage. On the Supreme Court’s ruling, part of that pension will become marital property. A party may wish to argue that a lower proportion of the pension should be treated as matrimonial property under Section 10(6)(b) of the Family Law (Scotland) Act 1985. This provides that “special circumstances” may include ‘the source of the funds or assets used to acquire any of the matrimonial property [or partnership property] where those funds or assets were not derived from the income or efforts of the [persons] during the marriage [or partnership]’
This briefing paper considers the approach to calculating the matrimonial property under the source of funds “special circumstances” argument for Defined Contribution (DC) pensions.
The most precise approach to calculating the matrimonial portion of a DC pension is to consider each contribution separately and look at the investment returns on each contribution. However, that requires knowing the investment returns on each contribution, such as by having a complete history of unit prices if the contributions are invested in a “unit fund”. These are seldom available, so an approximation is required.
The examples below show the proportion of the value of a DC pension fund attributable to contributions paid during the marriage period can be estimated by allowing for the average rate of investment return earned, sometimes called the “internal rate of return”. This is a common approach used by actuaries, although other approaches may also be valid.
For simplicity, our calculations are based on investment returns doubling investments over 10 years – so a contribution of £100,000 is worth £200,000 after ten years. That is an annual rate of return of about 7.2%. In practice, we would work out the annual rate of return based on the fund value at separation, all the contributions and, where relevant, withdrawals.
Example 1
- £10,000 was paid into a DC pension on 30 June 2015. This is not matrimonial.
- The parties married on 1 July 2015, i.e. one day later.
- Another £10,000 was paid on 2 July 2015, i.e. 1 day after they married. We treat this as matrimonial for the purposes of this briefing paper.
- The DC pension fund doubled by the time of separation on 1 July 2025 (i.e. it was worth £40,000 then).
Given both contributions were paid at almost exactly the same time, they would have broadly increased by the same amount over the period, and so 50% of the DC pension fund at the time of separation would have accrued during the marriage.
| Date | Amount Contributed |
Contribution Allowing for Investment Returns to Relevant Date* |
|
|---|---|---|---|
| Pre-marriage contribution | 30-Jun-15 | £10,000 | £20,000 |
| Post-marriage contribution | 2-Jul-15 | £10,000 | £20,000 |
| DC pension fund value | 1-Jul-25 | £40,000 |
* Allows for an internal rate of return of 7.2% p.a., which we can work out from the contributions and fund value.
| Total contributions with investment returns | £40,000 |
| Contributions in marriage with investment returns | £20,000 |
| Proportion attributed to marriage | 50.0% |
Example 2
- £10,000 was paid into a DC pension on 30 June 2005. This is not matrimonial.
- The parties married on 1 July 2010, i.e. five years later.
- Another £10,000 was paid on 1 July 2015, i.e. five years after they married, so it is matrimonial. The pension value was £20,000 before the contribution and £30,000 afterwards.
- The DC pension fund doubled again by the time of separation on 1 July 2025 (i.e. it was worth £60,000 then).
| Date | Amount Contributed |
Contribution Allowing for Investment Returns to Relevant Date* |
|
|---|---|---|---|
| Pre-marriage contribution | 30-Jun-05 | £10,000 | £40,000 |
| Post-marriage contribution | 1-Jul-15 | £10,000 | £20,000 |
| DC pension fund value | 1-Jul-25 | £60,000 |
* Allows for an internal rate of return of 7.2% p.a., which we can work out from the contributions and fund value.
| Total contributions with investment returns | £60,000 |
| Contributions in marriage with investment returns | £20,000 |
| Proportion attributed to marriage | 33.3% |
Example 3
As Example 2 above, but the member withdraws £20,000 from the DC pension fund the day before separation and so the DC pension fund value is £40,000 at 1 July 2025 (rather than £60,000).
From inspection, the same contributions have been paid in so the matrimonial proportion of the fund does not change i.e 33.3%. However, it is important to consider the withdrawals in the calculation, which some readers may not appreciate. In particular, if we ignore the withdrawal, the internal rate of return would be calculated incorrectly, thus wrongly attributing a higher amount of the DC pension fund to the marriage, as shown below.
| Wrong approach, ignoring withdrawal |
Date | Amount Contributed |
Contribution Allowing for Investment Returns to Relevant Date* |
|---|---|---|---|
| Pre-marriage contribution | 30-Jun-05 | £10,000 | £24,000 |
| Post-marriage contribution | 1-Jul-15 | £10,000 | £16,000 |
| DC pension fund value | 1-Jul-25 | £40,000 |
* Allows for an internal rate of return of 4.6% p.a. – wrongly worked out from the contributions and fund value because it failed to account for the withdrawal.
| Wrong approach, ignoring withdrawal | |
| Total contributions with investment returns | £40,000 |
| Contributions in marriage with investment returns | £16,000 |
| Proportion attributed to marriage | 40.0% |
We must allow for the withdrawal to calculate the internal rate of return. Only then can the contributions be correctly rolled-up as shown below:
| Correct approach, allowing for withdrawal |
Date | Amount Contributed |
Contribution Allowing for Investment Returns to Relevant Date* |
|---|---|---|---|
| Pre-marriage contribution | 30-Jun-05 | £10,000 | £40,000 |
| Post-marriage contribution | 1-Jul-15 | £10,000 | £20,000 |
| Withdrawal | 30-Jun-25 | -£20,000 | -£20,000 |
| DC pension fund value | 1-Jul-25 | -£40,000 | £40,000 |
* Allows for an internal rate of return of 7.2% p.a., which we can work out from the contributions, withdrawal and fund value.
| Correct approach, allowing for withdrawal | |
| Total contributions with investment returns | £60,000 |
| Contributions in marriage with investment returns | £20,000 |
| Proportion attributed to marriage | 33.3% |
The proportion attributed to the marriage is 33.3%, the same as that under Example 2.
Please note any monies withdrawn (such as the £20,000 taken on 30 June 2025 in the example above) are no longer pension assets. Any withdrawals should be considered by the parties alongside their other non-pension assets.