Pension rules after bankruptcy

If you declare yourself bankrupt, any pensions you have could be affected. Whether or not you’ll have to pay money out of your pension pot depends on the type of pension you have, how much of your contributions can be deemed 'reasonable', and the date of your bankruptcy.

What is bankruptcy?

Bankruptcy is a legal process that takes place when an individual or entity amasses a large amount of debt that can’t be paid back in the immediate future. Declaring yourself bankrupt allows the court to take control of your assets and use them to repay your debt. It means creditors can’t pursue you directly or seize assets.

During bankruptcy control is handed over to Trustee in Bankruptcy (TIB) who decides what can be reasonably considered as an ‘asset’ in order to repay your creditors. Anything in your possession can be seen as an asset, such as property and shares, which means that your pension could also be included under certain circumstances. For example, an ‘investment’ such as any savings you have sitting in an ISA can be seen as an asset, even though you may have earmarked this for your retirement.

What happens to your pension when you become bankrupt?

The laws concerning pensions and bankruptcy are complex. Usually a pension is protected against bankruptcy, especially if it’s classed as ‘approved’ by HMRC or has what’s known as a Forfeiture Clause, which automatically applies to workplace pensions. There are certain exceptions, depending on your circumstances so it’s important to understand how bankruptcy could impact your finances before you decide to declare yourself bankrupt.

Whether the TIB can stake a claim on your retirement savings depends on when you are due to start withdrawing your pension. If you aren’t going to get an income from your pension within four years of becoming bankrupt, the TIB can’t usually access your pension pot.

If you declared yourself bankrupt before 29 May 2000, pensions have less protection and would be more likely to be considered an asset by the TIB. However, for any bankruptcy filed after this date, the laws are different and your pension will usually be protected against any claim by the TIB.

Excessive contributions

As part of the bankruptcy process the TIB will look into your pension contribution history to see if you’ve paid large amounts towards your pension in the run up to your bankruptcy claim, with the intention of putting assets beyond their reach. In this instance, they can apply to the court and recover any amounts deemed to be ‘excessive contributions’ - i.e. if there’s evidence that you’ve been contributing unusually high amounts anytime within the last five years in order to deliberately avoid repaying creditors.

Pensions already being paid out

If you’re currently claiming a pension, then under the terms of the Insolvency Act 1986, a TIB can apply to the court for an income payments order. This would mean you would have to use part of your pension payments to help clear your debts over a maximum of three years, provided you and your family have sufficient income left over to live on.

Can you continue to contribute to your pension after declaring yourself bankrupt?

Whether or not you can continue paying into your pension is usually agreed at the discretion of the TIB. They may decide that any money you’d like to contribute to your pension should instead be used to repay your debt. However, any current pension schemes related to your employment shouldn’t be affected and your employer can also still contribute on your behalf.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 06-04-2024

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