Pensions in bankruptcy – as safe as houses?

When an insolvent individual comes through our doors for advice, they very often ask two questions when we discuss bankruptcy.

Firstly, is my house safe? And secondly, what about my pension?
The answer to neither is straightforward, but let’s look at pensions first of all.

Pensions & Bankruptcy
The Court of Appeal in England this month has lifted a whole lot of uncertainty around pensions in bankruptcy and has made the Court’s position on pensions very clear.

Since the early part of the 21st century, HMRC approved pensions were deemed to be outside of the bankruptcy estate. If you had not accessed your lump sum and had not started drawing down your pension by the time you become a bankrupt, then the pension was not part of your estate. And was yours for your retirement, post-bankruptcy.

In recent years, there have been a number of Court cases which have considered pensions and bankruptcy; the outcome of which have been of great interest to the insolvency profession, as well as those facing financial difficulty.

Firstly, in Raithatha v Williamson in 2012, the Court held that an undrawn pension could form part of an Income Payments Order; this meant that the bankrupt (who was aged 59 and coming 60) would be forced to draw down his pension and the Trustee would use surplus funds, after living expenses, to pay off his creditors. The Court’s decision was subsequently appealed but the appeal was later withdrawn.

Then in Horton v Henry in 2014, the Court held a bankrupt aged over 55 should not be forced to draw down their pension to pay their debts. Effectively overturning the Raithatha decision. And then that decision was also appealed.

The Court of Appeal issued its long awaited judgement on the appeal this month. The higher Court dismissed
the appeal and held that a bankrupt who had not elected to draw their lump sum or pension income could not be compelled to do so. In very specific terms, the Court of Appeal judgement referred to the significant disadvantages of bankruptcy, the implications for an individual who was a bankrupt in terms of being unable to obtain credit or act as a director of a limited company; and the Court went on to conclude that the protection of rights under private pension plans in bankruptcy remain and that an undrawn pension remained outside of a bankrupt’s estate.

This decision is a significant step forward and provides much needed clarity on the matter. That’s not to say that the decision may not be questioned again in time, but for now it seems that if you haven’t touched your pension by the time you are bankrupt, and don’t elect to draw it down during your bankruptcy, then it’s outside your estate.

But be careful. Some pensions may be set up to pay out without election at a certain age. If this happens during your bankruptcy, the funds may go direct to your Trustee.

Family Home & Bankruptcy
We haven’t forgot about the first question!

When you are adjudicated bankrupt, any equity in your own home vests in your Trustee in Bankruptcy, that is the person looking after your bankruptcy for creditors. If you have a massive mortgage on the property and the property is in negative equity, then there is no equity to invest in the Trustee and they will likely disclaim their interest in the property.

If there is marginal equity, or it is a borderline case, then your Trustee will likely sit tight to see where the property value gets to over time. A Trustee has three years to take action in the Courts to get at the equity in the house. Who knows where the value will go in that time? And is the debt being reduced in the meantime potentially creating equity for the benefit of your creditors?

Thirdly, if there is a small or no mortgage on the property, then your Trustee will be coming knocking looking for your share of any value.

A reliable independent property valuation is therefore key to assess the true value in your home; set that alongside any mortgage statement, calculate your share of any equity and look at your options from there.

If you are in nancial dif culty and need advice, contact Gerard Gildernew on 028 8772 4697 or at gerard.gildernew@gildernewandco.com for a free initial consultation, Gildernew & Co Ltd has made every effort to ensure the accuracy of this information. We do not accept responsibility for the consequences of any action you take in reliance on its contents. Professional advice should be sought if you are in financial difficulty before taking any action with regard to your financial affairs.