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Your Pension in Insolvency

A pension is a person’s largest asset and is meant to last us for our retirement to ensure that we do not have to work for the rest of our lives and be comfortable. So it is understandable why you might be worried about it when it comes to insolvency and bankruptcy. Why don’t we explain a few things to make it straight forward for you?

We should first look at the Bankruptcy process, particularly the role of the trustee in bankruptcy (TIB). The TIB is responsible for realising the debtor’s assets and distributing them fairly to the debtor’s creditors. They will usually be an Official Receiver or an officer of the Insolvency Service. There are cases where the OR will appoint a private Insolvency practitioner to act as TIB.

Key points’

  • A trustee may be able to claim pension funds under the Insolvency act 1986

  • Court cases have a historically nuanced position when it comes to pensions and bankruptcy rules

  • Pensions are usually protected in bankruptcy situations, but there are always exceptions

The TIB has wide-ranging powers and has the authority to investigate the debtor’s affairs, distribute funds and sell assets to get funds to pay off creditors. Legally, the TIB automatically takes over legal ownership of the debtor’s property. The ownership means deciding what to do with it to pay off the debtor’s debts. This property can include investments, so any assets held in an Isa, dealing account, or in their own name, such as certified shares, will be transferred to the TIB.

Pension investments are treated differently under the Welfare Reform and Pensions Act of 1999. This act provided a statutory footing to protect pensions and put them out of the reach of creditors. It means that, in practice, pensions do not get transferred to TIB in bankruptcy situations. However, this only applies to registered pension schemes with HMRC, which the legislation refers to as ‘approved pension arrangements. It does mean the Employer Financed Retirement Benefit Schemes may not have the same protection.

How Can a TIB Get Money Out of a Pension?

The Insolvency Act of 1986 provides TIB’s with two resources with which they can get money out of a pension:

1. An excessive contributions order under section 342A

2. An income payments order under section 310.

To claim excessive contributions, a TIB must persuade the court on two points. Firstly, they must argue that the contributions were paid to put them beyond the reach of creditors. Secondly, they must demonstrate that the contributions were excessive given the debtor’s personal and financial circumstances at the time. It is important to note that there is no official case law on excessive contributions, so it is not easy to gain any guidance on how courts might assess this.

Income payment orders are far more common, and it is where the TIB must persuade the court that the debtor receives income from their pension that is outside of their reasonable domestic needs. If this is proven, the court can grant the TIB an order to claim some or all of the pension.

If the debtor has a defined benefit scheme pension or a lifetime annuity, there is an obvious source of regular guaranteed income that the TIB can point towards, making an income payments order reasonably straightforward.

However, it is less apparent when the debtor has a drawdown fund, primarily if the debtor draws ad-hoc irregular amounts or even no amounts. In a case involving Horton, the judge held that the debtor only became entitled to the pension once it had become crystallized. This means that you have decided how you will receive your pension. The pension could be taken in an annuity or as a drawdown. Unfortunately, this ruling conflicted with a prior ruling in a near-identical case which left TIBs, debtors and their legal advisors in an awkward position.

Right to Elect

This conflict was resolved when Hotron was taken to the Court of Appeal, and the appeal was denied. It was ruled that the right to elect how to receive a pension is part of the contractual rights that remain vested in the debtor and not the TIB.

At age 55, the debtor only becomes entitled to a ‘right to elect’ not a ‘right to payment’. Under section 333 of the Insolvency Act 1986, the debtor has a general duty to cooperate with the TIB. The judge also noted that this section could not be used to compel the debtor to crystallize. A TIB cannot force a debtor to crystallize their pension.

The Insolvency service eventually ruled on it to ensure there was a clear understanding. In a move anticipating the pension freedoms that were due to take effect in April 2015, the updated guidance said that if a debtor is aged 55 or over and has uncrystallised funds, the debtor has the accessible wherewithal to meet their debts.

In practice, this means that if the pension exceeds the level of debt, the debtor might not be able to become bankrupt in the first place. This practice allows a fair degree of discretion in the initial phases of bankruptcy.

So, what does this all mean? Well, legally and broadly, your pension is protected. They cannot be claimed outright to pay off your creditors, and you cannot be compelled to crystallize your pension. All in all, your pension is protected, but there are circumstances where it might not be.

The decision to move forward with bankruptcy is not an easy one, so why not let us guide you? To find out more, visit our website on, email us at or give us a call on 0303 961 7169.

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