What happens to your pensions in bankruptcy?

Pension bankruptcy rules

Your bankruptcy can affect your pension. Whether you will need to withdraw money from your pension pot or not depends on factors such as the date of your bankruptcy, pension type, size of the pension pot, and how much of your contributions can be regarded as “reasonable.”


What is bankruptcy?

Bankruptcy is a legal action that includes a business or a person that cannot repay their debts. Typically, bankruptcy starts with a petition opened by a debtor or a legal representative on behalf of a creditor or creditors’ group. During this legal proceeding, the debtor’s assets are being evaluated and measured so that at least a portion of the outstanding debt can be repaid.

During this process, a Trustee in Bankruptcy (TIB) controls the debtor’s belongings. The TIB decides what can be reasonably regarded as an “asset” and can be used to repay the creditors. Pretty much anything that you have in your possession can be considered an asset. For example, shares, properties, bonds, and even your pension can be treated as an asset of value in some special circumstances. For example, TIB can mark your savings in an ISA as an asset, and you can easily lose them even though you got them earmarked as part of your retirement plan.

What happens to your pension if you become bankrupt?

Even though the laws surrounding bankruptcy are complex, there isn’t much room for concern as pensions are fairly protected against bankruptcy. Pensions labelled as approved by HMRC or labelled as Forfeiture Clause are perfectly safe against bankruptcy. It is worth mentioning that all workplace pensions automatically fall under the domain of the Forfeiture Clause. Special exceptions are made based on your particular circumstances. Because of that, it is essential to be well informed about what happens to your pensions after you declare bankruptcy.

Timing impacts many decisions when you declare bankruptcy. For example, TIB cannot make any claim on your pension pot if you won’t get any income from your pension within the first four years after you declare bankruptcy.

If you declared bankruptcy before 29 May 2000, your pension could easily be regarded as an asset by the TIB. That’s because of the previous laws in place. However, after that date, laws have changed, and the TIB can’t touch your pension.


Excessive contributions

One of the standard TIB procedures is to look into your pension contribution history. Their goal is to see if you’ve paid large amounts of contributions in the wake of your bankruptcy, intending to hide assets that are out of their reach. If their investigation reveals something they refer to as “excessive contributions” (unusually high contribution amounts), they can petition the court to recover some or all of that money. The recovered money then will be put toward paying out your debtors.

Pensions already being paid out

The Insolvency Act 1986 can be applied if you are already claiming a pension and part of your pension can go toward clearing your debt. TIB can make that claim under the mentioned act as long as you and your family are left with sufficient income to live on. However, TIB can claim parts of your pension for no longer than three years.

Can you keep making pension contributions after declaring bankruptcy?

Whether you can keep making contributions into your pension scheme or not is something you need to ask the TIB. It is within their prerogative to decide if they want your pension contributions to go toward repaying your debt or into your pension scheme. On the other hand, any pension contributions coming from your employer cannot be affected in any way, and the TIB cannot intervene. Plus, you can ask your employer to make contributions on your behalf.

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