Matt Reeds

Bankruptcy and my Pension

Posted on May 05, 2015 by Matt Reeds, Personal Insolvency Manager

I am expecting to see some pretty significant changes as to how pensions are dealt with by a Trustee in Bankruptcy following some recent case law, together with the proposals in George Osborne’s 2014 budget

Historically a Trustee in Bankruptcy could make a claim form a bankrupt’s uncrystallised pension rights, as these automatically formed part of the bankrupt’s estate. In addition, a Trustee could collect a bankrupt’s pension rights under an Income Payments Order for a period of up to 3 years.

In 1998 the Welfare Reform & Pensions Act was introduced, which stated that a bankrupt’s approved pension would not form part of the estate. A Trustee did still however have the power to apply for an Income Payments Order in respect of pensions already drawn down.

However, in the recent case of Raithatha v Williamson the Court denied a bankrupt protection from claims against pension entitlements by a Trustee, notwithstanding the fact that the bankrupt had chosen not to draw their pension prior to the making of the bankruptcy order. The Court held that undrawn pension rights could be treated as income and therefore capable of being subject to an Income Payments Order. It was further held that the entitlement to draw lump sum pension funds and income were both to be treated as pension income for the purposes of obtaining an Income Payments Order. In addition, the Court also dismissed the argument that a lump sum could not form part of an Income Payments Order and that lump sum payments need not be periodical or regular to be treated as income.

Current legislation obliged pensioners to purchase an annuity, which limited the amount available to a Trustee to be the Tax free lump sum of 25% of the fund, together income annuities.

However, the 2014 Budget contained proposed legislation that will eradicate the maximum sum that can be drawn down by a pensioner. As a result, a pensioner aged 55 or above can potentially withdraw their entire pension fund as cash from April 2015.

We are therefore entering untested territory with regards to pension schemes and, whilst the matter could well be taken to the Court of Appeal, it is clear that one of the major benefits of bankruptcy is now jeopardy. As such an insolvent individual should seriously consider the consequences and impact a bankruptcy order could have on their retirement plans.

As such an insolvent individual should seriously consider the consequences and impact a bankruptcy order could have on their retirement plans.