How protected are pensions under bankruptcy?
According to figures released earlier this year by the Insolvency Service, individual insolvencies in Q2 2018 were 27% higher than in Q2 2017.
The numbers still have a way to go to match their 2009 post-crisis peak, but it continues a general upward trend dating back to 2015.
Given that a pension is typically one of a client’s largest assets, it’s worth reviewing how well protected their pensions are in the event of bankruptcy.
Since the introduction of the Welfare Reform & Pensions Act 1999, pension schemes do not form part of an individual’s estate for bankruptcy purposes.
Therefore, while a Trustee in Bankruptcy (TIB) may be able to claim other assets belonging to an individual, they cannot generally claim funds held in a pension scheme.
It’s important to note that this applies to ‘approved pension schemes’. This includes all pension schemes that are registered with HMRC but may exclude unregistered schemes like EFRBSs.
This isn’t the end of the story, however, as a TIB does have a couple of options.
Firstly, they can ask a court to grant an order to claim back any ‘excessive’ contributions the individual made to their pension prior to their bankruptcy.
There is no definition of ‘excessive’ in the legislation, but if the contributions prejudiced the individual’s creditors and were made at the expense of the individual’s business or household expenses, for example, a court will consider allowing the TIB to recover them from the scheme.
Income Payments Order
The other option available to the TIB is an income payments order. Here, a court can grant an order over surplus pension income that is above and beyond the individual’s reasonable domestic needs.
How this could be applied where an individual has been taking irregular income drawdown payments (or indeed no income payments at all) has not been fully tested.
But if the individual has a defined benefit scheme pension, a lifetime annuity or a pattern of regular drawdown income, a TIB could be successful in claiming some of that for the individual’s creditors.
Insolvency Service guidelines
A pension scheme, on this basis, would seem to be reasonably well protected. However, the story doesn’t end there.
In 2015, the ‘pension freedoms’ were introduced, following which any pension scheme member could withdraw their entire pension fund if they wanted to.
Around the same time, the Insolvency Service updated their guidance for Official Receivers. This now says that where an individual is aged 55 or over and has unvested pension rights, they might not even be permitted to file for bankruptcy in the first place.
This is because they would have a pot of readily accessible funds they could use to pay their creditors, meaning bankruptcy might not be necessary.
Therefore, while pensions do still fall largely outside the grasp of a TIB, for clients aged 55 or over there is a definite sting in the tail to watch out for.