A Glasgow Sheriff, Judge McCormick, has ruled that pensions, even lump sums drawn down from a pension, cannot be treated as an asset in Bankruptcy, but instead must be treated as if they are wages.
The decision, which has come as a surprise, concerned a gentleman who had applied for his own bankruptcy. He then retired and became eligible during his bankruptcy for his pension, which included a lump sum of £194,260.14 (even after tax and other deductions, the amount was still £130,342.44).
The Judge ruled, although the Trustee in Bankruptcy could still order the Gentleman to pay some of the money from the lump sum each month, he was not entitled to take the full amount.
The decision has come as a surprise, as previously it was believed in Scotland if someone came into such a large amount of money during their bankruptcy, a Trustee was entitled to take the full amount.
However, it now appears the law in Scotland may be the same as in the rest of the UK.
So how is your Pension Treated if you are in Debt?
As many of us spend a lifetime working and paying into pensions, it is not unreasonable we one day hope to enjoy that pension.
However, understandably, people worry they may have to use their pensions to pay their debts.
This is not the case.
How are pensions treated in Bankruptcy and Protected Trust Deeds?
This law on this is contained in section 11 of the Welfare Reform and Pensions Act 1999, which states:
“Where a bankruptcy order is made against a person…any rights…under an approved pension arrangement are excluded from… [the].. estate”.
This means if you have a pension and have not drawn on it, even if you can, a Trustee in Bankruptcy or a Protected Trust Deed cannot force you to draw it down. Effectively it is protected.
What if you draw on you Pension?
However, what happens if you draw down your pension, before or during your debt solution?
This is the situation that the Gentleman in the Scottish case found himself, when he opted to take his pension during his bankruptcy. He essentially brought it into play, despite it previously being protected.
In this situation, the Trustee can deal with it. However, the law does not allow him to take all of it. Instead, as Sheriff McCormick held, he can only treat it as income, and reflect this in any contribution order he makes for monthly payments.
The fact there is pension income, therefore, is not ignored, but instead it is recognised that its purpose is to replace earnings. It, therefore, is treated like income from earnings and a contribution taken from it each month.
What if your Pension is not an Approved Pension?
An unapproved pension is one that HMRC has not stated is tax compliant. This means, in practice, the vast majority of pensions will be approved pensions.
Where a pension, however, is not an approved pension, this does not mean it will be denied any protection. Instead it can be agreed with the Trustee that it should be excluded from the solution, or if it has already been drawn down, it should be treated as income, like an approved pension. However, anyone in this situation should discuss it with their Trustee or take specialist advice before using Bankruptcy or a Protected Trust Deed to deal with their debts.
Can Pension Contributions be challenged?
If you are in a Bankruptcy or a Protected Trust Deed and have decided not to draw on your Pension, is it, therefore, safe?
The answer is generally yes, but there can be rare circumstances when it may not be. This is when you have been making excessive contributions into your pension. In such a situation, your Trustee may retrospectively challenge these.
What this basically means is you have been using your money unreasonably to increase the value of your pension rather than pay off your debts and this can be challenged. It would need to be shown, however, that you what you have been paying is in excess of what is reasonably required for your retirement. In such a case, if your Trustee believes this is the case, he can go to Court and ask the Court to order some of the funds are paid back to him.
The reality is, however, this is highly unusual and rarely done, not just because people rarely make excessive contributions, but evidencing that contributions are excessive is extremely difficult.
Can you still Pay into a Pension when Insolvent?
If you have not yet drawn down your pension, and are still working, the fact you are Bankrupt or in a Protected Trust Deed does not mean you cannot continue to make reasonable contributions to your Pension.
Being in debt and choosing to deal with it through Bankruptcy or a Protect Trust Deed does not prevent you from still preparing for your future.
Worried about debt?
What the recent decision of Sheriff McCormick shows is if you are struggling with problem debt, the fact you have a pension or are contributing to a pension doesn’t stop you from dealing with your debts today.
If you have a problem with debt and want more information on what options are available to you, call a Carrington Dean Money Adviser on 0800 043 1320 for free, confidential advice.
