Can you take a pension lump sum while bankrupt
- 24 Dec 2021
You should not draw a pension lump sum while you are bankrupt. If you do, the funds will be treated as a windfall and must be paid to the Official Receiver.
Included in this article:
- What happens if you take a pension lump sum while bankrupt?
- Can you draw cash before going bankrupt?
- What are your options after you are discharged?
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What happens if you take a pension lump sum while you are bankrupt?
If you reach the age of 55 during the year you are bankrupt, you may become eligible to draw a pension lump sum. However, doing this would be a bad idea.
Any lump sum you receive from your pension while you are bankrupt is classed as a windfall. As such, 100% of it (after any tax deduction) has to be paid to the Official Receiver (OR).
The good news is you can’t be forced to draw money. This ruling was made in 2016 by the Court of Appeal in Horton v Henry. The OR can only get their hand on your funds if you decide to draw a lump sum of your own free will.
There are also implications if you start to draw a regular income from a pension fund while you are bankrupt. This money must be declared to the OR.
Any additional surplus income you have as a result of starting to draw a regular income from your pension while bankrupt, will have to be paid towards your debts.
Can you draw cash from your pension before going bankrupt?
If you draw a pension lump sum within 5 years before going bankrupt, you must declare it on your application form. The OR will then require a detailed breakdown of how much you received and what you spent the money on.
There will be no problem if the money you received has been used for things such as legitimate living expenses or supporting monthly debt repayments. However, it can’t just be sitting in a bank account or in cash or be used to buy an asset such as a car or property. Such funds or possessions form part of your assets and would have to be handed to the OR.
You are not allowed to draw from your pension and use the money to pay off friends or family.
If you do this within 2 years of going bankrupt, it will be classed as a preferential payment. The OR will then have the right to go to the individual(s) who received the cash and demand it is returned. They can force the return with court action if necessary.
You will be asked whether you have cashed in or drawn a pension lump sum in the last 5 years on your bankruptcy application form.
What are your options after you are discharged?
Once you are discharged from bankruptcy, any pension lump sum you draw is yours to keep. The windfall clause no longer applies. From that point on, the OR has no claim on any money you subsequently decide to take from your pension.
For this reason, waiting until your bankruptcy is over is always the best option if you want to draw from a pension fund.
You can then use the funds for whatever you like. You can even pay off debt that you still owe to family or friends if you want.
If you are making payments towards your debt in the form of an IPA (Income Payment Agreement), these will continue after you are discharged. But in these circumstances, you can still take a lump sum from your pension and keep the money.
However, if you opt to take ongoing income payments during your IPA (even after discharge), you would still need to inform the OR. These would be added to your income and your monthly payment could increase as a result.
Thinking of drawing money from your pension before going bankrupt? Don’t act until you have taken advice from us. Call 0800 044 3194 or complete the form below.
I am 63 and wishing to withdraw the lump sum from my pension fund. Total gross is £38000. (Actual amount paid in £8000) It is a contracted out fund and I have not made contributions since 1998 and have no other pension fund. My bankruptcy was in 1993. I cannot remember the amount of the bankruptcy but it would have been under £10,000. Will the Trustee take control of this sum and do they take interest as well? Am I likely to lose this sum?
Hi Jennifer
I assume your pension fund was started before you went bankrupt? If so, I do not have good news for you.
Given you went bankrupt before May 2000, any pension you had at the time you went bankrupt remains an asset of your bankruptcy. This is the case even if you continued to pay into the fund after you were discharged….. The fund is under the control of the official receiver / Trustee. You will not be able to draw anything from it without their permission.
The amount the OR can take will normally be the total of the debt you owed at the time plus the OR’s fees and possibly interest on the debt charged at 8% per year since the date of the bankruptcy. Given this, the OR might be able to get their hands on your entire fund.
I assume you are working with a pensions adviser to in terms of withdrawing the lump sum. I recommend that you tell them about your bankruptcy and ask their advice. I would also suggest you contact the insolvency Service and find out from them exactly where you stand.
You can read more about pensions if you went bankrupt before May 2000 in section 4 of the following article: My pension and Bankruptcy
Good morning, I was declared bankrupt in 1990 and again in 2001. I have a pension taken out in 1986. The official receiver has claimed my pension for the 1990 bankruptcy (there are no claimants for this bankruptcy) but the trustees do not know this.. they have informed me that should there be funds left over they will apply them to my 2001 bankruptcy. Is my pension protected from the 2001 bankruptcy by the last ruling I can’t remember the date? Thank you
Hi ChrisE
This is certainly an interesting question. I believe it to be quite a rare occurrence. It is not one I have come up against in the past.
My person view is that on the face of it, once your pension has been used to pay off the debt and costs associated with your 1st bankruptcy, any remaining funds should be returned to you. I can’t see how such funds (which would have been exempt assets of your 2nd bankruptcy in 2001) could then be used to pay creditors associated with the 2nd bankruptcy.
That said, I am not a solicitor so I cannot give you a definitive answer on this. I suggest you get in contact with a specialist insolvency solicitor who may be able to provide more clarity.
Unfortunately, if the insolvency service digs their heels in, the only way to resolve the issue is likely to be in Court. A court battle would of course come at a cost. So after taking advice from a solicitor, you would need to weigh this up in your evaluation of the best way forward.
Hi I went into voluntary bankruptcy in 1996. I have a pension fund and a life insurance policy which has now matured does the court still have any claim against me please ? Regs Mal
Hi Mal
In May 2000, the Welfare Reform and Pensions Act was introduced. This protected most pensions from bankruptcy proceedings. However because you went bankrupt before this date, the insolvency service can legitimately make a claim on any pension in existence at that time.
The rules for life insurance are different. These policies are not protected by the Act. If you had a life policy at the time you went bankrupt, continued to pay it and did not already buy back your financial interest from the Official Receiver, they can claim it if and when it matures / pays out. This would be the same regardless of whether you went bankrupt before or after May 2000.