Paterson, who called time on his Scotland career shortly after the World Cup in New Zealand, has been recognised for his achievements over the past 12 years.
The 33-year-old has captained Scotland on 12 occasions and has been capped 109 times.
He made his debut in the 1999 World Cup against Spain before becoming a regular in the inaugural Six Nations in 2000.
He appeared at fly-half, wing and full-back and surpassed Gavin Hastings as Scotland's leading points scorer and Scott Murray's cap record on the 2008 tour to Argentina.
He won his 100th cap against Wales in Cardiff in 2010 but suffered a lacerated kidney in the match.
Edinburgh-born Paterson demonstrated his resilience, returning in the November 2010 win over South Africa and forcing his way into the starting line-up during the 2011 Six Nations.
He was first-choice full-back during the disappointing World Cup campaign in New Zealand but has now opted to give way to the next generation of talent.
In his international career, he amassed a total of 809 points and is the only Scot to have appeared in four World Cup tournaments.
Paterson began his club career with Gala before two spells with Edinburgh and a short stint at Gloucester.
He will continue to play for Edinburgh, for whom he is under contract until the end of the season, with the option of a further year.
Paterson said: ''I've only ever focused on playing well and doing the supporters, myself and my family proud. To be even nominated for this honour is something I would never have imagined.
"To be recognised in this way for doing something you love to do is a wee bit strange to be honest but it'll be a nice reminder of what I've achieved in both club and international rugby.
"There are so many who have helped with my career, going all the way back to playing at Galashiels Academy. Gary Parker and Garry Callander at Gala; Ian McGeechan, Jim Telfer, Frank Hadden, Mick Byrne and all the current Scotland coaching team.
"Through school rugby and my professional career, Rob Moffat was a great mentor and inspiration and always available whenever I needed to chat something through with him.
''I've been fortunate to play with so many great players and I'll never ever forget the cheers of those Murrayfield crowds.''
Scotland attack coach Gregor Townsend said: ''When I think of Chris, the words professionalism, competitor and humility are closely linked to how he has conducted himself over his career.
''I'd also add inspirational - thousands of kids will have taken up the game in Scotland thanks to his exploits on the field and his exemplary demeanour off it.
''He deserves to be recognised for all these qualities and I'd like to pass on the congratulations of everyone associated with the game.''
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