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Will I lose my pension in bankruptcy?


31 August 2016:  A Trustee in bankruptcy can claim the surplus income of a bankrupt by way of an Income Payments Order (IPO) in which monthly contributions, usually for a period of 3 years, are paid into the bankruptcy estate.  When calculating an IPO, the Trustee can take into account all sources of the bankrupt’s income, including income from pension, provided that pension income is already in payment at the date of the bankruptcy. 

The law currently indicates that the pension will not form part of the bankruptcy estate as long as it is an approved HMRC pension scheme.  Whilst this technically remains good law, a number of cases in recent years have raised questions about whether an undrawn pension could be claimed by a trustee in bankruptcy and these answers yet to be decisively answered by the courts.

The pensions controversy began in 2012 with the case of Raithatha v Williamson.  The bankrupt was entitled to draw down a lump sum of almost £250,000 at the age of 55.  The Trustee applied to the court for an IPO, which included the undrawn pension.  At the time of the Trustee’s application, the bankrupt was 59 years old and had no plans of drawing down on his pension, given that he was still in employment  The court held that his undrawn pension could be included in an IPO calculation.  This means that a person of pensionable age could be forced to fund payments under an IPO by drawing down on their pension.

In the case of Horton v Henry, which had similar facts to the above, the court took a very different view and held that the Trustee could not force a bankrupt to draw down on his pension.  This case is now awaiting appeal and it is far from certain how it will be decided. The Insolvency Service’s current guidance is that an undrawn pension scheme cannot be included in an IPO calculation and only an ongoing pension annuity should be included. 

Pensions can be an issue within a bankruptcy and thought needs to be given to the implications of bankruptcy before making that decision.

If you or your clients have any queries on the above – or any other financial concerns –  then please contact a member of the experienced BRI management team at one of our offices for free, confidential, no obligation and independent advice.