Pensions and bankruptcy

Published  01 March 2023
   5 min read

This article explores how bankruptcy can affect pensions

Key facts

What is bankruptcy?

It is a legal process of ‘last resort’ for someone who cannot pay their debts. It is the process to pay the individuals creditors.

Although the process and principles are similar different legislation applies in England, Wales, Northern Ireland, and Scotland.

Bankruptcy can be initiated by the individual or by one of their creditors. In Scotland the Accountant in Bankruptcy can also declare an individual bankrupt.

When does a bankruptcy end?

Normally the bankruptcy will be discharged after 12 months but this is dependent on the individual co-operating with the trustee. The bankruptcy can be extended if they do not.

Who administrates the bankrupt’s estate?

The bankrupt’s estate will administered by a trustee, who could be an official receiver, a licensed insolvency practitioner or the Accountant in Bankruptcy in Scotland. They are responsible for establishing what assets the individual has and paying their creditors.

How does it affect pensions?

There have been a number of court cases, see below, and legislation that provides protection for pension benefits.

The Welfare Reform and Pensions Act 1999 protects pension benefits from the trustee as they do not form part of their estate but only whilst they are held within the pension scheme.

Once benefits are in payment, the income is outside of the pension and are then included in the individual’s estate for bankruptcy. This means that the trustee can apply to the court to use some of that income to pay creditors. This would be done via an income payments order (IPO) or if they are in Scotland a debtor contribution order (DCO).

It is important to remember that the individual has to have enough money to support themselves and their family. So, unless there is excess income it is unlikely that trustee would apply for an IPO/DCO if there was not sufficient income available.

An IPO/DCO has to be applied for before the bankruptcy has been discharged and cannot last for more than 3 / 4 years respectively.

Another important aspect is the trustee cannot force the bankrupt to take their pension benefits. The trustee is required to use the individual’s estate to pay off their creditors in full or as fully as is possible. So, if the individual has sufficient funds, including benefits held in a pension they can access immediately, the trustee can apply for bankruptcy if the individual refuses to access the pension benefits.

Can a bankrupt pay contributions into a pension?

Yes. The trustee, as part of the bankruptcy process, will be aware of any ongoing pension contribution and would have to agree that they continue, rather than stop or be reduced and the money used to pay creditors.

Can the trustee reclaim ‘excessive contributions’?

It is possible that an individual will attempt to use the protections afforded to a pension to shelter money from their creditors. If the trustee believes that has happened and they believe they have sufficient evidence to prove that, they can apply to the court for a ‘restoration order’. If the court agrees it would mean the scheme has to pay any excessive contributions to the trustee.

What if the bankruptcy petition was made before 29 May 2000?

The situation with pensions for pre 29 May 2000 bankruptcies may be different from the above.

In most cases the pension benefits will have been protected by a forfeiture clause in the scheme rules. However, this was not the case for all types of pension scheme, in particular retirement annuity contracts (s226) and Buy-Out plans (s32).

Where there was no forfeiture clause the pension benefits could form part of the bankrupt’s estate. So, it is possible that the trustee could still claim some or all of those benefits when they eventually come into payment. The trustee will be able to confirm whether any claims remains outstanding.

Court cases 

Further information


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