If you expect to go bankrupt soon you may be worried about whether your pension will be safe.
The Insolvency Service published a summary of its new guidance on pensions and bankruptcy in England and Wales in 2015 after the “Pension Freedom” changes that year made it possible for many people to take money out of their pension from age 55, even if they are still working.
There was some legal uncertainty at that point, but that was resolved after an Appeal Court judgment in the Horton v Henry case in October 2016, and the IS guidance was not changed
There are five main situations to consider. At the bottom of the article, I look at where to get further advice and gives some links with further information.
Contents
Background – what is an IPA?
The Official Receiver calculates whether someone who goes bankrupt has enough “spare income” after meeting the reasonable domestic needs of their family to be able to make monthly payments. A large majority of people who go bankrupt do not have to make any monthly payments.
These monthly payments are known as an Income Payments Arrangement (IPA). Pensions affect how much money you have and so they can impact on IPAs.
IPAs last for three years. they can’t be extended. They can only be imposed before you are discharged. They are flexible, so you have to report extra income and if your circumstances get worse they can be reduced, to zero if necessary.
Case 1) Already getting a regular pension income
If you are getting a monthly pension, from a final salary scheme or an annuity or the state pension, this is treated the same as any other income for the OR’s IPA calculations.
Case 2) Bankrupt before 2000
If you went bankrupt before 29 May 2000, a Trustee in Bankruptcy, appointed by your OR, will have taken control of your assets, including your rights to future pensions, and will use them to pay off your creditors.
On 29 May 2000, new bankruptcy rules gave much greater protection to pensions for people that went bankrupt after that date.
Case 3) Bankrupt after 2000 and discharged
When you are not in an IPA
If no IPA was set before you were discharged, you can take your pension, including any lump sum, and the OR will have no claim on it. An IPA cannot be started after you are discharged because you have drawn a pension.
This also applies if an IPA was set and it has ended – the OR can have no further claim on any pension money.
During an IPA
If you are paying an IPA, money you take from your pension is taken into account for the IPA. A regular income from your pension forms part of the IPA calculations.
A lump sum from your pension is seen by the OR as a form of income. Some of it is likely to be claimed as a single payment by the OR as part of your IPA. The amount depends on the number of months remaining on the IPA:
- 24-36 months remaining – 75% of the lump sum
- 12-24 months remaining – 50% of the lump sum
- 1-12 months remaining – 25% of the lump sum.
Can you delay taking your pension?
If you have a choice about when you take your pension, it may be sensible to delay taking any money until your IPA has ended.
The Official Receiver will not tell you to take any money out of your pension – you can delay taking your pension for as long as you want.
If you have no choice about when to take your pension and it has to be started while you are paying an IPA, ask your pension provider what your options are for the amount of the tax-free lump sum you take. You may be able to exchange part of the tax-free lump sum most people take for a larger monthly pension – this may be a good idea if a lot of the tax-free lump sum would otherwise be claimed by the OR.
Case 4) Bankrupt after 2000 and undischarged
Starting to take a pension
If you start to take a monthly income from your pension, this will be taken into account in IPA calculations.
Taking a lump sum
If you take a lump sum from your pension before you are discharged, this is treated as an “after acquired” asset and you may have to pay all of it to the OR.
The OR will take into account the needs of you and your family. If your income is low, the OR may decide not to claim all or any of the lump sum. But if you are likely to have to pay an IPA, then it is probable that all the lump sum would be claimed by the OR
Can you delay taking your pension?
If you have a choice about when you take your pension, it may be sensible to delay taking any money until you are discharged and until after any IPA has ended.
The Official Receiver will not tell you to take any money out of your pension – you can delay taking your pension for as long as you want.
If you have no choice about when to take your pension and it has to be started before you are discharged, ask your pension provider what your options are for the amount of the tax-free lump sum you take. You may be able to exchange part of the tax-free lump sum most people take for a larger monthly pension, before discharge this may prevent the whole of the tax-free lump sum being claimed by the OR.
Case 5) Considering bankruptcy – the “insolvency check”
What is the insolvency check?
When you submit your bankruptcy application online, the Adjudicator looks at whether you are insolvent and will reject your application if you aren’t.
In 2015, when the “pensions freedoms” began and people started to be able to draw pensions from age 55, the insolvency check was extended to cover access to pensions 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 are not actually “insolvent” and so should not have your bankruptcy application approved.
This check won’t apply to you in any of the following situations:
- you were under 55 when you go bankrupt, or
- a creditor is making 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.
Recent court case (2021)
A 64-year-old had their bankruptcy application refused by an adjudicator due to them having access to their pension of £440,000 which would allow them to settle their debts of £170,000. This decision went to court, the judge reversed the adjudicator’s decision was reversed and Shaw was declared bankrupt. However, the Insolvency Service appealed this decision and it was reversed in the High Court.
If you think your bankruptcy may be refused because of your pension, you should talk to a debt adviser about your options.
Alternative debt options if your pension means you may fail the insolvency check
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. 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 consumer 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 a 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 overview. 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 advice & useful links
If you live in Scotland, this article is not relevant for you and you need to talk to a Scottish debt adviser.
On taking money from a pension
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.
On deciding whether to go bankrupt
It is always a good idea to take debt advice before applying for bankruptcy. You may think it is your only, or your best, option but it is worth the time to check with an expert. This is especially important if you are worried about whether you might be classified as “not insolvent” because of your pension.
Citizens Advice can give face-to-face advice or, for telephone advice, call National Debtline.
Challenging any decisions when you are bankrupt
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.
Useful links
- The full Insolvency Service guidance is here: Guidance issued to official receivers.
- For a general article on taking money early from a pension: Should you use your pension to clear your debts?
- How much tax you would pay if you take money from your pension: Which? calculator.
SR says
I made a mistake by ending my relationship with my former accountant when i entered bankruptcy. This was because i thought i would not pay tax and i wanted to, 1 save money and 2, have a new accountant based in London where i live. I now have a new accountant and this has cost me a lot too. If i had kept my accountant this would no doubt, have been flagged up sooner as I said, my mistake.
When I first contacted the OR about the tax, they at first seemed to agree that i was not liable for the tax up to years 18/19. This put my mind at rest but my accountants were confused.
When i went back to the OR about this they came back to me saying that, as i was self employed I was liable for the tax, and this had been taken into consideration when setting my payments. I was quite shocked by this as I have been making payments of just over a thousand pounds each month. I am earning about 30,000 per year before tax and, my living expenses are at least 16,000 per year not including food and clothing. I don`t think i would have been able to pay my tax out of this. I don`t really feel this the insolvency office has been clear with my case as i mentioned before, and they have appeared to be confused themselves. I am however, prepared to take responsibility for my own mistakes even if it means forfeiting my pension pot.
Sara (Debt Camel) says
So what is the tax bill for a year?
SR says
As far as i can understand it, without asking my accountant approx £7,000 the overall bill from the revenue is more than double this.
elizabeth says
hi i was just wondering if you could tell me if i would have all my pension take from me when i withdraw it next mth as i became bankrupt 13 years ago , i have had my hours at work reduced so will need this pension to make up for the sort fall of wages
Sara (Debt Camel) says
So you were bankrupt in about 2007? Were you discharged?
elizabeth says
yes, and i think i was from what i remember? it came in the form of a letter telling me i was, the only reason i had to be make bankrupt as well as my husband is that my name was on a few of the debts as a joint account
Sara (Debt Camel) says
If there is ANY chance your bankruptcy was before 2000, you need to get this sorted before making the decision on your pension withdrawal.
But if your bankruptcy was after 2000 AND you were discharged (it would VERY rare not to have been and you should have known about it) then you will be in Case 3 in the article above and the OR will not have a claim on your pension if you withdraw it.
This does NOT mean that this is a sensible thing for you to do though. Please talk to a debt adviser about all your other debt options first, even if you don’t think they will work this is worth a try. Phone National Debtline on 0808 808 4000.
elizabeth says
Thank you so very much!!!!!! this is a great help and a weight of my mind at the moment , i will definitely give the debtline a call and see what the other options are . Many thanks once again wish i had found you sooner !!!
Anthony says
Hi Sara
i was made Bankrupt in 1995 i know a bad year for pensions holders
The OR put a marker on my pension
the pension could have been drawn on from 2014 when i was 56 but i heard nothing
asked the OR if they were still interested in it and they said yes and appointed a company who are now sending letters to me
I realise that the pension vests in the OR or trustee but i wonder if they are entitled to all of the fund or perhaps i hope a lump sum plus an annuity or whatever for 5 yrs its a mystery
i read this on a link i thought a while ago and feel that it cant have changed to my detriment
I am 62 and clutching at straws in the hope that i may receive part of the pension fund at some point in the future
If i am entitled to any part of the fund will this happen automatically or do i have to raise this with the appointed company who may of course not accept
this
thank you for your time
Sara (Debt Camel) says
I’m sorry, I can’t say anything useful on this. Your OR/Trustee should explain the situation to you.
Anthony says
Hi Sara
i know its more complicated for those who were made bankrupt prior to 2000 as the pension forms part of the assets of the bankrupt
unlike bankruptcies after may 2000 when they do not but i am only asking for a view on this from something that i read from a LINK on this website SCHEDULE 61 i think
i just hoped for your view of this situation as it seems that people in my situation are left to their own devices and largely forgotten
i have had no contact with the OR TRUSTEE for 25 yrs and thought that you may help me as you clearly would know of other situations like mine
sorry to bother you and thank you again
Sara (Debt Camel) says
All I can say is, talk to the trustee.
Jay says
Hi, need some advice please.
My wife is carrying debts with a bank and credit card companies, currently being managed by step change. the debts were accrued by her ex husband and became 1/2 hers during divorce. she has an NHS pension she has paid into since 18 and is now 54 and has left the uk, we are now living overseas. the debts are a decent amount and will be difficult to pay off at any time. if she stops paying or applies for bankruptcy, is her pension safe from any claims?
thanks.
Sara (Debt Camel) says
are you likely to ever return to the UK?
jay says
For visits but not to live.
Sara (Debt Camel) says
It sounds as though her debts may be quite old? Are they credit cards, overdrafts, loans or what? When were the accounts opened (roughly) and when were they defaulted on? Have they all been sold to debt collectors?
When will she be 55? When is she planning to draw her NHS pension?
Jay says
Debts are:
Credit cards x 2 – £14k
Store accounts x 2 £2k (bought by Link?)
Overdraft £400
Personal loan. £17k
All opened over 10 years ago.
Step change took on management 2016.
55 next year, planning on drawing pension in 5 years time.
Sara (Debt Camel) says
are the credit card and loan debts still with the original lender? Or have they been bought by a debt collector?
jay says
LOAN with original bank
CREDIT CARDS (x2) now with LINK
CREDIT CARD still with originator
STORE CARD 1 now with ROBINSON WAY
STORE CARD 2 now with NCO LOWELL
OVERDRAFT still with bank
Sara (Debt Camel) says
As you are not in the EU, she can go bankrupt in England for 3 years after she left the country, see https://debtcamel.co.uk/bankrupt-england-from-abroad/. (I’m not saying this is a good idea, just mentioning the time limit.)
Her NHS pension is presumably a “final salary” scheme, not a money purchase pension? If it is, it will not stop her going bankrupt and can’t be touched by the Official Receiver if she goes bankrupt in the next couple of years (which she would have to because of the time limit.)
Her pension is likely to be completely safe from creditors if she just stops paying. The creditors would have to take her to court in England then try to enforce the judgment in the US. That is pretty unlikely and if it did happen I can’t see how it could ever get at an unpaid pension.
For all the debts except the overdraft that have been sold to debt collectors, she could look at https://debtcamel.co.uk/ask-cca-agreement-for-debt/. If any of the debt collectors can’t produce the CCA agreement, you can simply stop paying them. Tell StepChange to remove the debt from her DMP.
jay says
thanks Sara for great advice. who would you recommend to help verify whether her pension is definitely safe? Id like to hire someone in UK as we are depending on this for our future and whilst everything indicates it should be, we cant afford to take any chances. thanks
Sara (Debt Camel) says
Do you mean in bankruptcy? Or if she just stops paying?
jay says
which would you advise is the option in this scenario?
Sara (Debt Camel) says
what did StepChange say in 2016? And what did they say at her annual review?
jay says
the situation in 2016 was not as now. there was no plan to move abroad. Should we hire an accountant or lawyer ? We need to verify 100% the protection of her pension.
thanks
Sara (Debt Camel) says
She should have annual reviews, has she asked StepChange? You can talk to National Debtline from abroad, https://www.nationaldebtline.org/fact-sheet-library/bankruptcy-and-foreign-issues-ew/
jay says
All we’re trying to find out out is whether to stop paying debts or file for bankruptcy and will her pension be 100% safe with either option.
Sara (Debt Camel) says
And I am suggesting you talk to National Debtline. Most solicitors and accountants are not that good at debt advice – National Debtline are experts.
Peter says
Hi I was made bankrupt in Jan 2012 and had an automatic discharge a year later. I now want to take a lump sum from one of my pensions ( all of which were disclosed at the time of my bankruptcy). I believe case three applys to me but my pension provider says there is a hold on my pension. Does your advice change as I had a combative TIB who took over from the OR. I am worried as the TIB never seems to let me get on with my life and always try bullying dirty tricks.
Sara (Debt Camel) says
I suggest you ask why there is a hold on your pension.
david says
hi i was made bankrupt in 1999 and had too old pensions one private and one with my old company i used to work for can i now cash them in or will the old bankruptcy order take them from me please
Weatherman says
Hi David
Did you declare (tell the Official Receiver about) these pensions at the time you went bankrupt?
david says
yes i did but cant remember what they said about them, and cant get hold of anyone and cant find old paper work
Weatherman says
OK – you first need to find out what they said at the time. You can email the Insolvency Service’s Pensions team, who should be able to help you further: Pension.Team@insolvency.gov.uk
Susan says
If I am made bankrupt will the monthly income from my personal annuity for life be taken from me?
Sara (Debt Camel) says
You are already getting paid this?
Susan says
Yes for many years
Sara (Debt Camel) says
Then this is just an income for you each month. It isn’t an asset that can be claimed by the Official Receiver but it will be part of the calculations about how much “spare income” you have each month after paying your normal bills and living expenses. Most people don’t have to make any monthly payments in bankruptcy, but about 1 in 5 people have to make monthly payments for 3 years,
If you haven’t yet talked to anyone about bankruptcy, I suggest you phone National Debtline on 0808 808 4000. They can see if you have any better options and will be able to talk about whether you are likely to have to make any monthly payments.
Susan Morris says
Very many thanks
Keith says
I was made bankrupt in 1993 and discharged in 1996. Just found out that my pension has been taken by the OR. I have spoken to their Pensions team who have explained the situation. Shocked, especially as the law was changed in 2000 to protect pensions. My only creditors are HMRC and IR. to add insult to injury, I have been told that they can claim interest at 8% annually, i.e 28years. This seems grossly unfair, is that correct?
Sara (Debt Camel) says
The change in 2000 was not retrospective – it did not give any additional protection to people that went bankrupt before then.
What sort of pension was this? Were further contributions made after your bankruptcy?
I assume you did not carry on contributing to that pension
Keith says
The pension was a defined contribution pension with Phoenix Life. The amount I was made bankrupt for was relatively small and the only creditor is HMRC. The issue will be whether HMRC can charge statutory interest of 8% for the full 28 years since the bankruptcy.
Sara (Debt Camel) says
So far as I am aware they can.
Sean says
Keith
Was the pension originally a pension due to you contracting out of Serps?
Keith says
No, it was just a personal pension as I was self employed. A further question, the Official Receiver seems to want me to cash the policy and for the whole proceeds to go to them. They will then try and track down creditors with me paying for all the costs involved. If there is anything left at the end, it will be paid back to me. Surely the OR should have to provide creditors details first to prove he still has a right to the policy? This is 28 years after the event. This is not a transparent process and the OR, having employed an insolvency practitioner, seem to have no obligation to keep these costs to a minimum. I have already paid a further sum to the OR in 2006, unfortunately I have not kept any of the paperwork. Surely it has to be up to the OR to prove any outstanding debt?
Keith says
So if I was made bankrupt for £10,000 in 1993, they can now charge around £83,000 in interest charges? There is something seriously wrong here.
Sara (Debt Camel) says
The 8% is simple interest, not compound. So that would be about £23,000.
Julie Williams says
I was made bankrupt on May 14th 2021, I am 66 on 4th May 2022 and due to retire, I will get a small lump sum when i retire as have not worked for the nhs for very long (8 years). I am on my own and had to go bankrupt due to ill health and not being able to go to work. Will the bankruptcy take all my money. ?
Sara (Debt Camel) says
Do you have any options to delay taking this pension? or to take it as a very small monthly or annual payments instead of a lump sum?
Who did you take advice from about going bankrupt – did they mention this issue?
Julie Williams says
Hi Sara
I took advice from my union to go bankrupt but was told if I delay my lumpsum until after i was discharged I would be ok.
Sara (Debt Camel) says
so you have the right to delay taking the lump sum? I can’t say whether that is correct or not, your union is best placed to advise on this.
Neil Symons says
Hi Sarah,
I was made bankrupt in 1998, but my pension at the time was a SERPS, am I right to believe that some of this type of pension will have ‘protected rights’ and therefore will not be seen as an asset in the bankruptcy?
Sara (Debt Camel) says
Probably. See https://www.insolvencydirect.bis.gov.uk/freedomofinformationtechnical/technicalmanual/Ch61-72/Chapter61/Part4/Part4.htm 61.57
Ask your OR or Trustee about this.
Neil Symons says
Hi Sarah,
I was made bankrupt on the 26th November 1998 and I was discharged from it on the 26th November 2001. I have been in contact with my pension provider and they reported:
‘ The Official Reciver still retains an interest in your plan. (A copy of the letter from Gowling WLF was included in the letter from my pension provider) it went on to say, please note this plan consists of former protected rights benefit and non protected rights benefits. The funds from the former protected rights benifit are excluded from the bankrupt’s estate and therfore you (I) are entilteled to claim the benefits from the former protected rights benefit. Please note that if any benefits from the non protected rights benefits of this above plan are to be paid to you, we would need the official receiver or Gowling WLF (UK) LLP to confirm this to us in writing that they have no further interest in the non protected rights benefit of this plan and do not intend to make a claim.’
It also goes onto say:
‘If you wish to claim the funds from the former protected rights benefit from this plan, please contact us.’
Would the former protected rights benefit be the significant part of the pension? I have had a further letter from my pension provider and they have identified two separate types of benefits. non-protected rights and former protected rights. I am going to assume that these are the amounts I will and wont be able to access?
Thanks
Neil
Sara (Debt Camel) says
if any benefits from the non protected rights benefits of this above plan are to be paid to you, we would need the official receiver or Gowling WLF (UK) LLP to confirm this to us in writing that they have no further interest in the non protected rights benefit of this plan and do not intend to make a claim
So that is what you meed to do.
Would the former protected rights benefit be the significant part of the pension?
i am sorry but I can’t answer these questions – I would prefer not to guess.
Ernest says
Hi Sarah, I am considering going bankrupt, I am living on universal credit and carers allowance, as I am my disabled wife’s full time carer, I also get an income from a small private pension of £20.80 per month, do you know if I will have to pay anything towards my bankruptcy.
Thank you, Ernie.
Sara (Debt Camel) says
Hi Ernie,
could I ask a couple of questions? Are you renting or buying?
do you own a car – if so, how much is it worth?
do you know how much all your debts add up to?
also are any of the debts joint and does your wife have any debts in her name?
Rob says
Hi Sara. I wondered what we, can do here. I went bankrupt and was discharged last August. Our mortgage agreement has run out and it has now been put on a variable rate. It has gone up by 250 already a month. Is there anything we can do and is there an option for my wife to take on the mortgage alone? Her credit rating has been affected we think due to the connection with me on the mortgage but we have never missed a payment. The bankruptcy wasn’t to do with the house or my wife. Many thanks, Rob
Sara (Debt Camel) says
is there any equity in the house? Could your wife afford the mortgage on her own salary alone?
GRAHAM SMITH says
hi , i entered voluntary bankruptcy march 2000 and was discharged. i have just received notification that a private pension i had prior to my bankruptcy has matured as im 65 this year. i was given the option of a lump sum which i have agreed to. i have been informed by phoenix life ( the insurance company) that the insolvency service still hold an interest in this policy, meaning i wont get a penny after 22 years !!!! is this correct /can i challenge this ? im disabled & receive state disability benefits .
Sara (Debt Camel) says
As the article above says, “If you went bankrupt before 29 May 2000, a Trustee in Bankruptcy, appointed by your OR, will have taken control of your assets, including your rights to future pensions, and will use them to pay off your creditors.”
I can’t give you any more information on this – you can talk to your local Citizens Advice if you think there is something wrong in your case.
Stephen says
Hi I was made bankrupt in 1988 I took out a pension in 2001 can the receiver claim this pension of me towards the debt. Also I opted out of serps about the same time which the receiver tried to claim but said they had no interest in it I am very confused with the law as to what is happening with the pension can you help please
Sara (Debt Camel) says
I suggest you go to your local Citizens Advice – if someone there can’t answer these questions they will be able to access the national Specialist Debt Advice Service for help.
Stephen says
Thanks for the info I will call them on Monday
william says
Hi, Can you help i am 65 and presently bankrupt but have no ipa to pay and am now discharged. I have a works pension i can take out but am worried if the receiver can claim my lump sum ?
Sara (Debt Camel) says
This should not be a problem, see https://debtcamel.co.uk/discharged-from-bankruptcy/