Bankruptcy: what will happen to my pension?

pension written in the sandWe’re frequently told how important it is to save for our retirement. But what happens to your pension if you are made bankrupt? Fiona Gaskell, of Clough & Willis, explains.

Prior to 29 May 2000

When the Welfare Reform and Pensions Act 1999 came into force, it depended on whether or not you had an occupational scheme run by (and generally contributed to) by your employer, or whether you had a personal pension.

Bankrupts who were members of an occupational scheme were generally protected from having their lump sum or pension being claimed by their trustee in bankruptcy, unless they were already in receipt of the lump sum, or pension. If they were, the lump sum would form part of their estate, just like any other savings, and the trustee could apply for an income payments order in respect of the income received from the pension. 

These schemes were protected because they were administered by pension trustees who had discretion about who to pay the pension to, and so, in theory, the bankrupt could not claim the pension as of right, and therefore it was not deemed to form part of the bankrupt’s estate.

If a bankrupt had a personal pension, there was no third party to intervene to prevent them from becoming entitled to any lump sum due under the pension and the income from any annuity. So any pension rights that had not already paid out to the bankrupt were treated as part of the bankrupt’s estate, and vested in their trustee in bankruptcy, to be realised at some date in the future when the bankrupt was entitled to access their pension.

This caused substantial injustice, and so the Welfare Reform and Pensions Act 1999 was introduced to protect personal pensions. But this only affected bankruptcies made on or after 29 May 2000. If you were made bankrupt before this legislation came into force, it is likely that your personal pension has already vested in your trustee in bankruptcy, and they will be entitled to call upon that once you are of an age to access the pension fund. 

After 29 May 2000

If you were made bankrupt after 29 May 2000, generally speaking, your pension will not form part of your estate, though a trustee can always claw back any excessive pension contributions that were made prior to the bankruptcy, as these would be viewed as attempting to dispose of assets to the detriment of creditors.

If, however, you are in receipt of a pension when you are declared bankrupt, the income from that pension can be taken into account in determining whether you should pay an income payments order.

The position therefore looked to be settled, but in the last couple of years, there have been some attempts by trustees to claim the pension pots of bankrupts, and the decisions that have been made have been conflicting and caused some uncertainty.

Raithatha vs Williamson

The first case is Raithatha v Williamson, where the bankrupt had a substantial pension fund and was entitled to draw on this at age 55, but had not yet done so. 

Shortly before he was due to be discharged from bankruptcy, his trustee applied for an income payments order, based on the fact that he could draw money down from his pension. An order was made, effectively requiring the bankrupt to do just that, so that a surplus income was created that enabled the trustee to receive funds from an income payments order. 

This decision caused some surprise, as it seemed to suggest that future pension rights could be claimed, and not just any pension that the bankrupt was already receiving when he was made bankrupt, or indeed started to receive during the time before he was discharged.

Horton vs Henry

Since then, a further case, Horton v Henry, had an opposite result. The bankrupt, who again had a substantial pension pot of personal pensions and a SIPP, faced an application for an income payments order from his trustee, which sought the 25% tax-free lump sum that the bankrupt was entitled to call for, together with the annuity that he would receive for the following 3 years. 

The bankrupt opposed this, saying that he had no intention of drawing down his pension. The court decided that the trustee’s application should fail, because the bankrupt had not elected to draw down his pension. 

A considerable amount of uncertainty has been created by these cases. Horton v Henry is being appealed, and the decision should be available later this year.

As if this isn’t bad enough, the budget changes in relation to pensions which came into force on 6 April now enable people to draw down the whole of their pension pot, subject to tax from age 55. This means that trustees will once again be looking at bankrupts’ pension pots as an asset to be realised for the benefit of creditors. 

As these changes have only come into force very recently, it is not possible to say exactly what practical consequences they will have for anyone who is made bankrupt after age 55. But as a trustee always has an obligation to realise assets for the benefit of creditors, it’s likely that further claims will be made to pensions, especially where the size of the fund is significant.

About the author

Fiona Gaskell is partner at Clough & Willis Solicitors, and specialises in insolvency, property litigation and licensing. Follow @BurySolicitor or visit the website for more information.