What happens to my pension if I am made bankrupt?

Where bankruptcy petitions are presented after 29 May 2000, as long as the scheme has been approved by HM Revenue and Customs (HMRC), generally speaking it cannot be claimed in the bankruptcy. For petitions prior to 29 May 2000, some pension schemes could be claimed – see leaflet ‘ What will happen to my pension?’

What types of pensions are there?

There are three pension types – occupational pensions, personal pensions and a state pension.

An occupational pension is where an employer has set up a pension scheme. The employer may make all, none or part of the pension contributions. A personal pension is a pension policy taken out by an individual with a pension provider, usually a life insurance company.

If the bankrupt is actually receiving the pension payments, the trustee in bankruptcy will include such income in assessing whether the bankrupt can afford to make contributions towards his bankruptcy debts (under an income payments agreement or order)

If the bankrupt is not due to receive the pension until sometime in the future, the trustee needs to establish whether the pension is a bankruptcy asset.

Is the pension a bankruptcy asset?

A state pension does not form part of a bankrupt’s estate.

Both personal and occupational pension schemes can potentially form part of the bankrupt’s estate.

If a pension policy does form part of a bankrupt’s estate, the trustee in bankruptcy can claim the lump sum as well as the regular payments. However, it is possible for the bankrupt to ‘buy back’ his interest in the pension policy from the trustee in bankruptcy, and the bankrupt should contact his trustee in this respect.

Where the Bankruptcy petition was presented after 29 May 2000

As a result of the Welfare Reform & Pensions Act 1999, where a bankrupt holds an interest in a pension, this does not form part of the bankrupt’s estate if the scheme has been approved by the HMRC. It is envisaged that most occupational and personal pension schemes will have been approved by the HMRC, and will not form part of the bankruptcy estate. 

However, if the pension comes into payment during the period of the bankruptcy, the trustee can claim the lump sum under a one-off Income Payments Order (IPO).  Also, the regular payments received can be used in any calculation of the bankrupt’s ability to make payments under an IPO.

If HMRC has not approved the pension scheme (which may arise where the pension scheme is run by a small business, for example), the rules for petitions presented before 29 May 2000 apply.

Where the Bankruptcy petition was presented before 29 May 2000

Personal pension policies

On the making of a bankruptcy order, all rights and benefits under a paid-up personal pension policy vests in the bankruptcy estate, except any State Earnings Related Pension

Scheme (SERPS) - related part (known as protected rights). The nature of pensions are such that, notwithstanding that they form part of the bankruptcy estate, the trustee in bankruptcy can have no better title to the policy than the bankrupt did. As a consequence, the trustee in bankruptcy cannot take the pension benefits until the bankrupt reaches the earliest retirement age under the terms of the policy (e.g. 50^th birthday).

Occupational pension policies

Some occupational pension schemes have ‘forfeiture clauses’, which means that in the event of bankruptcy, the bankrupt automatically loses his pension rights, and therefore, there is no asset for the bankruptcy estate. The trustee needs to inspect the pension scheme rules to establish whether the pension scheme has a valid forfeiture clause.