Pensions in bankruptcy: All you need to know

Pensions in bankruptcy: All you need to know

Prior to May 29 2000, it was incredibly complex to establish if a pension would be safe in the event of the member going bankrupt.

On that date, however, a statutory protection was introduced by the Welfare Reform and Pensions Act 1999, which meant a trustee in bankruptcy could not access the funds while they remained in a registered pension scheme. 

But trustees in bankruptcy can apply to the court for an income payment order if the pension is in payment or comes into payment before the bankrupt is discharged, so pensions are not entirely safe. In addition to these income payment orders, it is also possible for a trustee in bankruptcy to apply for an excessive contribution order if it appears that contributions have been made to a registered pension scheme to take them out of the bankrupt’s estate. 

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Income payment orders

Income payment orders allow income payments from a registered pension scheme to be paid directly to the trustee in bankruptcy instead of the member, although they can’t force the fund to be crystallised to make the payment. An income payment order will usually be for a specific period, not more than three years, and can continue beyond the discharge of the bankruptcy if the court directs it. 

Excessive contribution orders

Legislation was introduced on 6 April 2002 to allow the trustee in bankruptcy to apply for a court order to recover contributions paid to a pension scheme – if that scheme was inappropriate to the individual’s circumstances and “unfairly prejudiced” the individual’s creditors.

The order can cover contributions made to approved and unapproved schemes by the individual or employer. In particular it extends the recovery of excessive contributions to approved personal pension/stakeholder schemes and Section 226 arrangements. 

When deciding whether creditors have been unfairly prejudiced, the court will consider in particular whether contributions were made for the purpose of putting them beyond creditors’ reach, and if the total amount of any contribution or accrued pension benefit was excessive in view of the individual’s circumstances when those contributions were made.

The order can include the following provisions:

• Trustees/scheme authorities pay an amount (not exceeding the lesser of the amount of the excessive contributions and the value of the individual’s rights – or excluded rights if the arrangement is an unapproved scheme – under the scheme) to the trustee in bankruptcy;

• Adjusting the liabilities of the scheme in respect of the individual or in respect of any other person that derive, directly or indirectly, from the rights of the individual (ie, typically reducing the amount of benefit or future benefit payable); and

• Recovery of trustees’/scheme authorities’ costs in giving effect to the order or providing information to the trustee in bankruptcy.

Where the order requires a payment to be made to the trustee in bankruptcy it must also require the liabilities of the arrangement to be correspondingly reduced.