Pensions and bankruptcy

These FAQs are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of current legislation, which may change.

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The treatment of pension rights on bankruptcy used to be uncertain and complex. Thankfully, significant changes were introduced by the Welfare Reform and Pensions Act 1999 which helped make the legal position clearer.

Bankruptcy is a legal process. Although different legislation applies in England and Wales, Northern Ireland and Scotland, the broad principles are the same. Bankruptcy involves the transfer of an individual’s assets into the hands of a trustee in bankruptcy (‘trustee’) for the benefit of the individual’s creditors. The bankruptcy proceedings will either be initiated by an individual making themselves bankrupt or by one or more creditors drawing up a petition as a result of debts not being paid. In either situation, a court will decide whether to issue a bankruptcy order depending on the facts of the case. However, in Scotland, the Accountant in Bankruptcy, an agency of the Scottish Government, can declare an individual bankrupt.

The trustee will either be an official receiver (who is an officer of the court), the Accountant in Bankruptcy (in Scotland) or an insolvency practitioner appointed by the court. It falls on the trustee to carry out certain duties relating to the bankruptcy. Generally, this will involve collecting information relating to the bankrupt’s financial affairs, disposing of assets held and making payments to creditors. Some assets can be protected and examples include items such as clothing, bedding and furniture. It may also be possible to protect tools and vehicles necessary for the bankrupt’s employment or business. 

A bankruptcy is automatically discharged after 12 months on the provision that the bankrupt has co-operated with the trustee. If the bankrupt hasn’t co-operated with the trustee, the bankruptcy period may be extended.  

Discharge means that a bankrupt is freed from the restrictions of bankruptcy and released from most of the debts they owe. It does not mean that they will automatically regain control of their assets. The trustee could continue to administer the assets which formed the bankruptcy estate, including assets which may not be realisable until sometime in the future (for example, an endowment policy). Similarly, an income payments order or agreement requiring a bankrupt to make payments from their income towards their debts may continue beyond the date of discharge. 

The position for anyone being made bankrupt now is that there is a statutory bankruptcy protection in force that applies to most pension funds. This protection was introduced by the Welfare Reform and Pensions Act 1999 and means that a trustee cannot access the funds whilst they remain in a registered pension scheme such as an occupational scheme, a personal pension, a S226 retirement annuity or a S32 buyout policy. 

In practice, if the trustee is advised that a pension fund is held in a registered pension scheme, then they should acknowledge that the fund does not form part of the bankrupt’s estate.

The position is different where benefits are paid from a registered pension scheme to a bankrupt during the bankruptcy period (usually 12 months, as outlined in the previous section). A trustee is able to apply to the court for an income payments order to have the payments made to him or her instead of the bankrupt for a specified period. This would only tend to happen if the court finds that the bankrupt’s total income is in excess of the income the bankrupt and his or her family could reasonably be expected to live on.

Payments being made from GMP benefits can be taken into account when totalling income but cannot be included in an income payments order itself. The same situation applies to protected rights benefits that were put into payment before 6 April 2012 as these benefits continue to be treated the same even after protected rights were abolished from 6 April 2012. However, any benefits brought into payment on or after 6 April 2012 arising from funds that were formerly protected rights could be included in an income payments order. An income payments order lasts for a maximum of three years so can continue beyond the discharge of the bankruptcy. 

If a bankrupt’s pension rights are held in a scheme that is not a registered pension scheme, then the rights automatically transfer to the trustee. However, the rights held can be excluded from a bankrupt’s estate if the bankrupt applies to the court for an ‘exclusion order’ or if a ‘qualifying agreement’ is made between the trustee and the bankrupt. Regulations set out the requirements and procedures, including time limits, which must be met if the exclusion is to apply.

Yes, although the trustee may need to agree to this. The trustee may determine that money used to make personal contributions could be used to reduce the bankrupt’s debts. However, personal contributions made as a condition of the bankrupt’s employment (eg, contributions to an occupational pension scheme or a GPP) are unlikely to be affected and can usually continue to be paid. Any pension contributions by an employer can continue to be made. 

Generally, investment decisions should continue to be made in the same way as before an individual was declared bankrupt. As the funds in a registered pension scheme do not form part of the bankruptcy estate, the trustee has no interest in them. The bankrupt should continue to make decisions on where their funds are invested.  

Yes, if an individual has been deliberately putting money into a pension arrangement in order to put it beyond the reach of his or her creditors. A trustee can apply to the court for a ‘restoration order’ that would require the scheme trustees or administrator to pay to the trustee any contributions deemed to be excessive. 

It is up to a trustee to show to the court that any contributions were excessive, taking into account the bankrupt’s circumstances when the contributions were paid and whether creditors were unfairly prejudiced or not. Additionally, the order can provide for the scheme trustees or administrator to recover costs that they incur in either providing any necessary information or in implementing the order itself. 

There are also special rules that apply to pension sharing on divorce cases. In very limited circumstances, it is possible for a trustee to recover excessive contributions that were made by a bankrupt before a pension sharing order was made. The recovery would be made from the pension credit granted to the ex-spouse.   

As mentioned above, if an individual is made bankrupt, pension funds in registered pension schemes don’t form part of the bankruptcy estate. This protection applies to individuals made bankrupt as a result of a petition made on or after 29 May 2000. If the petition for bankruptcy was made before 29 May 2000, the position depends on the circumstances of each case. Individuals petitioned for bankruptcy before that date will, in the vast majority of cases, have had their bankruptcy discharged after three years. However, it may still be possible for their trustee to claim benefits coming into payment now from pension funds which existed at the time the individual was made bankrupt.

If the funds were in an approved occupational pension scheme, they are likely to be protected from claims by the trustee. Many approved occupational pension schemes contained a forfeiture clause under which, if a member became bankrupt, benefits were forfeited; consequently, there was nothing for the trustee to claim. Forfeited benefits fell to the scheme trustees to be paid at their discretion and they could choose to pay benefits on retirement to the member or to the member’s dependents.

Some approved personal pension schemes also contained a forfeiture clause which operated in a similar way. If there was no such clause, the pension funds formed part of the bankruptcy estate and benefits payable from those funds could be claimed by the trustee.

Individual contracts, such as S226 retirement annuity contracts and S32 buy-out policies, did not contain a forfeiture clause. As they are individual contracts, there are no scheme trustees to exercise the discretion.

Where pension funds form part of the bankruptcy estate, the trustee can generally only claim the benefits to which the member was entitled, and at the age at which the member could take them. This will still be the case under the pension flexibility rules introduced from 6 April 2015.

For example, if someone aged 30 had been made bankrupt in 1995 and had a S32 buy-out policy, the trustee would have to wait until 2020 – when the individual reaches age 55 – before being able to claim any of the pension benefits. Of course, if the outstanding debts had been paid off by that date, the trustee would have no further interest in the policy and ‘ownership’ would pass back to the individual.

England and Wales – The Insolvency Service has produced a number of useful guides which can be downloaded from its website at:

https://www.gov.uk/government/organisations/insolvency-service(Opens new window)

Scotland – The Office of the Accountant in Bankruptcy has a wide range of helpful guides available on its website:

http://www.aib.gov.uk(Opens new window)

Northern Ireland – The Insolvency Service of Northern Ireland has information on its website at: 

http://www.detini.gov.uk/deti-insolvency-index.htm(Opens new window)

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