What happens to my pension in bankruptcy?
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Your pension may be one of your largest assets. You may have a personal pension to which you have been contributing for many years. Perhaps you are in your employer’s pension scheme? Or, maybe you are entitled to a state pension?
So, what happens to your pension in bankruptcy? Here, we look at the impact of bankruptcy on your private pension and your state pension. We also consider what happens to any pension payments you are receiving when you are made bankrupt.
What happens to your existing pensions?
Until recently, if a bankruptcy order was made on a bankruptcy petition presented on or after 29 May 2000, all pension schemes that had been approved by HM Revenue and Customs (HMRC) remained outside a bankrupt’s estate. This meant that your pensions could not be claimed by the trustee in bankruptcy.
‘Approved’ pension schemes include personal pension schemes approved by HMRC, stakeholder pensions and other schemes registered under section 153 of the Finance Act 2004. If the Official Receiver is in any doubt as to whether your pension scheme has been approved by HMRC, he or she will write to your pension provider for confirmation. If your pension scheme is ‘unapproved’, you may still be able to exclude it from your bankruptcy estate by applying to court for an exclusion order or by making a qualifying agreement with your trustee.
Pensions expert and lawyer Simon Tyler says: “Individuals usually think that the money they put into a pension scheme will be out of any creditors’ reach if they become bankrupt. That is generally true for individuals who are not yet drawing a pension from the scheme.”
However, following a ruling on 4 April 2012, your personal pension is not automatically safe from creditors. The judgement in Raithatha v Williamson means that if you are of an age where you are entitled to draw from your private pension (typically age 55) and have not done so, creditors can force you to use that money to pay off their debts.
In general terms:
- Creditors cannot demand payment from your pension if you are below retirement age
- Creditors may be able to force you to access money from your personal pension if you are at an age where you can draw from it (even if you haven’t done so yet)
If you’re not sure what will happen to your pension, make sure you take professional advice.
What happens to your state pension?
The trustee in bankruptcy cannot claim your state pension, any payments from the State Second Pension (formerly known as SERPS) or any protected rights. ‘Protected rights’ are those which arise in any pension you may have where you or your employer have contracted out of SERPS.
What happens to any pension payments you are receiving?
When you are made bankrupt, the Official Receiver or your trustee in bankruptcy will often ask you to agree to make regular contributions towards your bankruptcy debts, if you can afford to. You normally do this through an Income Payments Agreement (IPA) or an Income Payments Order (IPO).
The amount you pay is determined by your ‘disposable’ income. This is determined by deducting your day-to-day living expenses from your total income. Your income may include a salary from a PAYE job, self-employment profits, benefits or payments from one or more pensions.
This means that if you are declared bankrupt, you may have to pay part of your pension income to your creditors in the form of an IPA or an IPO