If you expect to go bankrupt soon you may be worried about whether your pension will be safe. The pension changes in April 2015 made it possible for many people to take money from their pension from age 55, even if they are still working, and there were concerns that this would change the protection for pensions in bankruptcy.
The Insolvency Service has published a summary of its new guidance on pensions and bankruptcy in England and Wales. There was some legal uncertainty, but that was resolved after an Appeal Court judgment in the Horton case in October 2016.
There are five main situations to consider. At the bottom of the article I, look at where to get further advice and give some links with further information.
Case 1) Already getting a pension
If you are getting a pension income, from a final salary scheme or an annuity, then this will be taken into account when the Official Receiver calculates if you should make monthly payments (“an IPA”). This has always been the case and it hasn’t changed. You only need to read the other cases if you also have a pension that is not yet being paid.
Case 2) Bankrupt before 2000
On 29 May 2000, new bankruptcy rules gave much greater protection to pensions. If you went bankrupt before this date any pension you had will be dealt with by the Trustee for your bankruptcy. The new guidelines say “Steps will be taken to realise the maximum amounts available for creditors in these cases, applying the changes in pension rules which will come into effect on 1 April 2015.” You should talk to your Trustee about what the implications of this will be for you. If you are unhappy with what you are told, you should consider taking advice (see below) on whether it can be challenged. The rest of these Cases do not apply to you. NB Please don’t ask me questions in the Comments below as I don’t know, I am not going to guess and I am just going to repeat what it says in this paragraph.
Case 3) Bankrupt after 2000 and discharged
- The Official Receiver will not tell you to take any money out of your pension.
- If you choose to take a lump sum out of your pension, it is not an asset which the Official Receiver can claim, even if you are still paying an IPA.
- If you are currently paying an IPA and you choose to take a regular income from your pension, this extra income will form part of the IPA calculations – you should therefore consider delaying taking a pension until your three year IPA has ended.
- If an IPA has not been set, one cannot be started after discharge, so you can start to take an income from your pension whenever you want.
Case 4) Bankrupt after 2000 and undischarged
- The Official Receiver will not tell you to take any money out of your undrawn pension.
- If you choose to take a lump sum from your pension before you are discharged, this would be treated as an “after acquired” asset and you would have to pay it to the Official Receiver. You should therefore delay withdrawing any money until you are discharged.
- If you choose to take an income from your pension, this will be taken into account in IPA calculations. It would usually be better to delay taking this until after your IPA has ended, or until after your discharge if no IPA has been set.
Once you are discharged, Case 3 will apply to you. If you went bankrupt after 5 April 2015, Case 5 also applies to you.
Case 5) Bankrupt after 5 April 2015 – new “insolvency” check
Here you went bankrupt after the new pension rules came into force. Whilst you are undischarged, Case 4 applies; once you are discharged Case 3 will apply.
There is one additional factor – a new “insolvency check” has been introduced for some people. The Insolvency Service’s guidelines state:
“Where the debtor is over 55 and has access to an undrawn personal pension fund … the official receivers are asked to consider whether the insolvency test has been met and, at the date of the petition the debtor is unable to meet their debts. In bankruptcy the official receiver will consider whether it would be appropriate to seek an annulment of the order.”
This is saying 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. When you submit your bankruptcy application online, the Adjudicator looks at whether you are insolvent and will reject your application if you aren’t.
You won’t be affected by this if any of the following points apply to you:
- you were under 55 when you went bankrupt, or
- a creditor made you bankrupt, or
- your pensions are already in payment through an annuity, or
- your only undrawn pension is a “defined benefit” scheme, sometimes known as a “final salary” scheme. The Official Receiver is only interested in personal pensions, sometimes known as “defined contribution” or “money purchase” pensions.
This guidance doesn’t spell out the exact calculation that the Adjudicator will do but it will take into account the tax and charges you would pay if you took money out of your pension. Both the tax and the charges could be more than you expect, see the Links at bottom of this article. One potential grey area is benefits – if you are receiving means-tested benefits, you need advice on whether these could be affected if you withdraw money from your pension.
If you are worried about whether you might be classified as “not insolvent”, you need to take some debt advice before you submit your bankruptcy application. Citizens Advice can give face-to-face advice or, for telephone advice, call National Debtline. You could also consider contacting your phoning the Insolvency Service’s helpline.
Alternative debt options
If your undrawn pension is too large for you to be able to go bankrupt your possible alternatives will depend on how large your debts are, how large your pension is and your general financial situation. These could include:
- taking some money out of your pension to clear some or all of your debts;
- consider making full and final settlement offers, so you may not need to repay the full amount of your debts and can leave more of your pension untouched. Full and Final offers are most likely to be accepted on consumers debts (credit cards, bank loans, payday loans etc) that you have already defaulted on;
- if taking your pension early would involve a lot of extra tax and charges, it may be better to postpone this for a while, possibly having debt management plan in the interim. You may be able to minimise tax by spreading your withdrawals across different tax years;
- you could look at the alternative of an IVA, but this isn’t an easy option, see this Guide to IVAs. It may be much simpler to take some money out of your pension and get full and final settlements with it. This would mean not having to make IVA payments for 5 years and you would avoid having an IVA insolvency marker on your credit file. Also read Is your pension safe in an IVA?
Where to get further advice
If you are thinking of taking money out of your pension, get a Pension Wise appointment. This will make sure you are aware of all the different options for using your pension – there are a lot of them! The appointments are free and can be over the phone or face-to-face.
Pension Wise will not give you advice on your debt problems. If you are getting any means-tested benefits, you may also need advice on whether these will be affected by taking money out of your pension. Citizens Advice is a good place to go to for advice on both debts and benefits.
If you are unhappy about the decision of an Official Receiver (or a Trustee in Bankruptcy if one has been appointed), you need legal advice on whether you can challenge it. Your local Citizens Advice may be able to help or to refer you to a local Law Centre that can give you free advice. Otherwise you need to look for a solicitor who has experience with personal insolvency.
If you live in Scotland, this article is not relevant for you and you need to talk to a Scottish debt adviser.
- The full Insolvency Service guidance is here: Guidance issued to official receivers.
- If you are interested in the recent Appeal Court decision: Pensions safe in bankruptcy after Appeal Court decision
- To find out more about taking money out of a pension: Should you use your pension to clear your debts?
- How much tax you would pay: use this Which? calculator.
- You may face early encashment charges (these depend on who your pension is with at the moment) and withdrawal and other charges (these additional charges that will depend on where you pension is when you take the money out).
- For more information about bankruptcy , see Debt Camel’s Guide to Bankruptcy which answers common questions, has a timeline so you can see what happens when and generally tries to avoid jargon.