My Pension and Bankruptcy
If you go bankrupt your pension should not be at risk. However there are implications if you are already receiving payments and in terms of lump sum withdrawals.
- The effect on your pension if you go bankrupt
- What if you already receive payments?
- Can you draw a lump sum from your Pension while bankrupt?
- Rules if you went bankrupt before May 2000
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The Effect on your Pension if you go Bankrupt
In May 2000 (after the introduction of the Welfare Reform & Pensions Act) pension funds were made an exempt asset of bankruptcy. As such if you now go bankrupt any money already in your fund is protected. It cannot be taken to pay your debts.
In addition you cannot be forced to start taking pension payments while bankrupt to increase your income and thus ability to make payments towards your debts.
This position was challenged in the courts in April 2012 in the case of Raithatha v Williamson. However in October 2016 the Court of Appeal in Horton v Henry confirmed individuals cannot be forced to access their pension while bankrupt.
If you are currently paying into a personal pension the Official Receiver could require you to suspend further deposits until you are discharged.
What happens in Bankruptcy if you already receive Pension Payments?
Once you are bankrupt the Official Receiver will assess your income and living expenses. They want to establish if you have any disposable income which can be paid towards your debts.
If you are receiving pension payments you must include these in your income calculation. This does not mean you will have to hand over all the money you are receiving. It must simply be included as part of your total income.
If your total income is greater than your total reasonable living expenses budget you will be required to pay the surplus towards your debts. This payment will normally last 3 years unless your circumstances change.
Any pension payments you are receiving must be declared if you go Bankrupt. They must be included when calculating whether you have any disposable income.
Can you draw a Lump Sum from your Pension while you are Bankrupt?
If you have a personal pension you can decide to draw cash lump sums from it after you reach the age of 55. If you reach this age while you are bankrupt you cannot be forced to do this to help repay your debts (following the ruling of Horton v Henry).
However it is vital to understand that if you choose to take a lump sum while you are bankrupt it is then considered to be a windfall. In other words the amount you draw down would have to be paid to the Official Receiver.
If you are 55 or older your ability to draw cash from your fund may be taken into account when considering whether or not you are eligable to go bankrupt. If you could draw enough money to pay your debt in full then your bankruptcy application may be rejected because you have sufficient funds to pay your debts.
You should not draw down cash lump sums from your pension while you are bankrupt. Such withdrawals are considered to be windfalls and would have to be handed to the Official Receiver.
What happens to your Pension if you went Bankrupt before 29th May 2000
If you went Bankrupt before 29 May 2000 any pension fund you had already built up on the day you went bankrupt is not an exempt asset. The beneficiary of the fund would be the Official Receiver or your bankruptcy Trustee.
In other words when you reach an age where you can start drawing your pension or you can access it in the form of cash draw downs these payments will go to the Official Receiver and not you.
All such cases where the official receiver is trustee are dealt with by the Insolvency Service’s Long Term Asset and Distribution Team pensions unit.
If you went bankrupt before May 2000 and are now 55 or older you may receive communication from the Insolvency Service requesting that you withdraw a lump sum from your pension which must be paid to them.
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