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Is my pension pot safe if I go bankrupt?

Many people seeking debt advice worry that if they go bankrupt, their personal pensions will be seized by their trustee and made available for the benefit of their creditors.

This includes, sole traders with business debt struggling to pay taxes due to HMRC or individuals who have incurred credit card debt.

From 2000, pension pots have been excluded from the bankrupt’s estate.  This includes not only the pension fund itself, but any related rights such as the right to receive a death benefit or the right to bring a legal claim in respect of the pension.

However, the Government has introduced changes to the pension rules which came into effect in April 2015 to enable individuals to have greater flexibility to access their pension savings from age 55. This has led to bankrupts being concerned as to whether these changes could make their pension funds less secure and effectively be forced to withdraw their lump sum or additional sums and make these available to their trustee.

Summary of the main changes

The main relevant changes that will affect bankrupts are below:

  • allow all of the funds in a money purchase arrangement to be taken as an authorised taxed lump sum;
  • increase the flexibility of the income drawdown rules by removing the maximum ‘cap’ on withdrawal from 6 April 2015;
  • enable those with ‘capped’ drawdown to convert to a new flexible drawdown fund once arranged with their scheme should they wish;
  • enable pension schemes to make payments directly from pension savings with 25 per cent taken tax-free (instead of a tax-free lump sum);
  • introduce a limited right for scheme trustees and managers to override their scheme’s rules to pay flexible pensions and lump sums from money purchase pension savings;
  • remove some restrictions on lifetime annuity payments;

But what impact will that have if the individual is made bankrupt?

Can my trustee access my pension if I go bankrupt?

This new flexibility for access to pensions has had an unintended consequence for bankrupts and their trustees whether it relates to personal or business debt.

The previous strategy adopted by trustees in bankruptcy and general debt advice has been to use the income payment orders (IPOs) or income payment agreements (IPAs) provisions in the Insolvency legislation to secure contributions from the bankrupt to bring into account unused pension rights and to contribute to the bankrupt’s estate any available lump sum and annuity that would be in excess of the bankrupt’s reasonable domestic needs which would then be made available for the bankrupt’s creditors.  This trustee strategy was followed after the legal case of Raithatha v Williamson [2012] was brought to court.

However, this strategy changed when Robert Englehart QC considered, in the matter of Horton v Henry [2014], that the language of the insolvency legislation did not allow the trustee to follow the IPO/IPA strategy and therefore the trustee could not touch the funds not yet drawn down from the bankrupt’s pension scheme.

Because the present decision means that the previous case law in Raithatha is now unsafe, permission to appeal the decision was given to the trustee.  In giving permission Deputy Judge Englehart hoped that the Court of Appeal would clarify which was appropriate.  This appeal is due to be heard shortly.

Until then, whilst excess income from a pension in payment remains at the mercy of an IPO, the trustee cannot require the bankrupt to draw down a pension pot for the benefit of creditors, no matter how large the pot or for what purpose it is being maintained.

This is good news for bankrupts as they cannot currently be forced to dip into their pension pot but it is obviously not so good news for the creditors.   However trustees, bankrupts and creditors alike will be watching this space for the outcome of the appeal as it could have a fundamental effect on the return for creditors in bankruptcy.

Most commentators seem to agree that the decision in Horton more accurately reflects the intention of Parliament in removing most pensions from the ‘assets’ available to Trustees as bankruptcy realisations via the Welfare Reform and Pensions Act 1999 than Raithatha, however, the position and fate of pension pots will remain uncertain until the Court of Appeal determines which way the axe will fall.

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