Bankrupt’s Pension Safe From Creditors

People who get into financial difficulties leading to bankruptcy will be relieved to hear of a recent decision by the Court of Appeal which has confirmed that a bankrupt cannot be forced to draw down their pension entitlement to provide funds for their creditors.

The case involved a man, now aged 61, who declared himself bankrupt in 2012. A trustee in bankruptcy was appointed. The trustee sought access to his very substantial pension funds, which the man is now able to take, in order to satisfy the claims of his creditors.

The man refused to take his pensions. He is being provided for by his wife and family and has no need of the pension income.

In general, pensions cannot be taken by a bankrupt’s trustees. However, the Insolvency Act 1986 does allow this to happen when there is income over and above the bankrupt’s ‘reasonable domestic needs’. It was decided in a 2012 case that this rule can be applied to pensions which have not yet been taken.

The claim ran as far as the Court of Appeal, which concluded that the 2012 case was incorrectly decided and that a trustee in bankruptcy has no right to require that an approved pension is taken in order to provide assets for the bankrupt’s creditors.

The case is very significant as changes over the last few years allow many holders of pensions to take their pension as they choose rather than buying an annuity.

Pensions which are not taken prior to age 75 can normally pass tax-free on death to a nominated beneficiary. When the pension pot is not taken and death occurs after 75, the pension pot will normally be subject to Income Tax at the beneficiary’s marginal rate of tax. If the size of the pension pot exceeds the ‘lifetime allowance’ (currently £1 million), additional tax will arise.