28th November 2016 at 11:12am
If you’ve built up your retirement savings over your lifetime and are unfortunate enough to fall on difficult times, you’d still want to be able to rely on it in your later years.
Which is why a recent Court of Appeal (Hinton v Wotherspoon, 2016) ruling is good news, and eases concerns that creditors could force someone who becomes bankrupt to hand over their pension pot.
Hold on, surely your pension is safe from bankruptcy?
Pension funds have been protected from creditors since the Welfare Reform and Pensions Act 1999, but pension income has not.
The 2015 pension freedoms, which allow people to take all their pension savings in one go once they reach 55, brought about some uncertainty. Could someone be forced to take all their fund as income and tax free cash?
The recent case centred on just that point.
The trustees in bankruptcy wanted the bankrupt person to access their pension – they were over 55 – and use their income and tax-free cash from a SIPP and personal pensions to pay off their debts.
The Court ruled that the trustees could not do this, meaning that those who have built up savings during their lifetime can use them to support themselves in retirement.
There are still areas of uncertainty
It’s worth highlighting this is only the case for certain types of pensions, such as a Self Invested Personal Pension (SIPP), and where the person involved hasn’t yet started to take their pension benefits as income.
If you have a defined benefit (DB) or occupational money purchase plan, you will expect to start taking your pension from your normal retirement date.
But, if you are bankrupt at that time, it is unclear if you could delay the start of your pension, or whether you could be made to take it. Once income starts to be paid, an Income Payments Order could be imposed on you to repay your debts.
That’s not yet crystal clear.
What if you are already taking an income from your pension?
Things are different in this case because this is already your income and would likely be within the reach of creditors as part of an Income Payments Order if you became bankrupt.
Good news for pensions
One thing is sure, planning and saving in an appropriate way to fund your retirement while your financial circumstances are in good shape, makes sense.
Knowing that those savings can be used for what’s intended will be reassuring for anyone who is unfortunate enough to fall on hard times and ends up being made bankrupt.
A word of caution
On a final point, it’s worth highlighting that paying more into your pension just before being made bankrupt wouldn’t protect your payments from creditors.
In those circumstances, payments can be ‘unwound’ and put back within the reach of creditors.
Read more about bankruptcy and how it could affect you as an individual, on the gov.uk Guide to Bankruptcy.
The information in this blog or any response to comments should not be regarded as financial advice and is based on our understanding in November 2016.