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Is my pension safe if I go bankrupt?

Over the years there have been a number of changes to the law surrounding a Bankrupt’s ability to keep his pension out of his or her bankruptcy. This has led to some confusion and more than likely Mr Joe Public probably thinking that a Trustee (the person in charge of your bankruptcy) will take a swipe at this for the benefit of his creditors.

Historically Trustees did have the ability to bring the pension pot into the bankruptcy, however, more recently it was thought that a new legal case could change this. Insolvency practitioners have been keeping an eye on these developments and following a delayed hearing, and then a reserved judgment, the Courts appear to have finally come to a conclusion.

The result, which was decided this month, was a win for the preservation of the pension against the attempts by the Trustee in Bankruptcy to get it.

The original problem came about by Trustees attacking the pension pot by making an ‘income payment order’ (IPO) which is available to all Trustees and allows them to take a slice of your surplus earnings for a number of months, usually 3 years. However, this new type of IPO targeted the pension pot by requiring the Bankrupt, who would be aged over 55, to release a lump sum from his pension and then pay this over to the bankruptcy.

Recent changes in the pension reforms in 2015 made this a little extra tasty by the abolition of the former 25% cap on lump sums.

However, there were conflicting decisions, in one Court it was decided that you could make such an order, but in 2014 another Judge said you couldn’t. Trustees and creditors were unhappy with this later decision and it therefore fell to the Court of Appeal to review the matter and then subsequently reject the appeal.

By way of background, and as an example at the upper end of scale, the second case, which decided that you couldn’t take a lump sum looked something like this…

An individual had made himself Bankrupt as he had incurred debts of around £6.5m. He had a very generous pension provision, with a SIPP worth around £850,000 and 3 personal pensions which gave various rights at various ages. The debtor was 58 when he applied for bankruptcy and at that time he hadn’t drawn down any of the funds
The Trustee of his bankruptcy made an application requiring him to claim his lump sums and pension incomes, which he was entitled to do as he was over 55, and then pay them over to him. This was an acceptable practice for Trustees.

The Bankrupt obviously refused, he claimed that he had not yet become entitled to the monies and at the time it did not form part of his assets. The case went to Court and the judge sided with the debtor. The Trustee, somewhat unhappy that he was missing out on a significant asset decided to appeal the decision and that then led us to the decision last week. The Court of Appeal sided with the judge and this is likely to now be the views that most Trustees will follow going forwards….until the law changes again.
A word of warning, if you are thinking of planning a bankruptcy in the future and you intend to make significant payments into your pension, the above ruling does not stop the Trustee from taking the more straightforward action available to him by taking recovery action against excessive pension contributions.

Also, within the new bankruptcy process they have introduced an “insolvency check”. On applications for individuals over 55 the insolvency service will take into account the amounts available to an undrawn personal pension fund when assessing a Bankrupt’s assets vs liabilities.  Essentially, if you could have taken money out of your pension and that would have been enough to repay the debts that were included in your bankruptcy, then you were not actually “insolvent” and so should not have gone Bankrupt. They will then proceed to reject your application for bankruptcy!

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