If you are thinking about bankruptcy, or have been made bankrupt, then the good news is: your pension is not classed as an asset. This means you are protected against any claim on your pension savings made by the official receiver (sometimes known as the trustee in bankruptcy).
However, as with most things pension related, there are a lot of ifs, buts and maybes that you need to consider. Knowing where you stand when it comes to bankruptcy and your pension can mean a much-needed slice of reassurance and peace of mind during what can be a very challenging time.
Can my pension affect a bankruptcy application?
Yes, if you are in a position where you can withdraw lump sums from your pension. It depends on your age, what type of pension you have and the value of your debt.
For example, let’s say you are 55 or over and have a personal pension plan, which generally means you can withdraw as much or as little of your pot as you want. The first 25% you withdraw is tax free. Any subsequent withdrawals count as income and are taxed at your marginal rate.
If you can withdraw from your pension enough money to clear your debt your bankruptcy application could be refused.
What if I don’t declare my pension savings when applying for bankruptcy?
During your application for bankruptcy you are asked to declare you pension savings, and it makes sense to do so. If you don’t and the official receiver later discovers that you could have used pension savings to clear your debt, your bankruptcy arrangement could be annulled.
I’ve been declared bankrupt but want to take money from my pension…
Let’s say you have been declared bankrupt and turn 55, the age from which you can start accessing many different types of pension. While the official receiver cannot force you to take money from your pension, any sums you do withdraw will be classed as income and could therefore be claimed by the receiver.
The bottom line is: if you are bankrupt, 55 or over and thinking about taking money from your pension, get independent advice before making any final decisions.
What happens if I am paying into a workplace pension?
The official receiver will take your workplace pension payments into account when calculating how much you have to pay back after being declared bankrupt. If you are part of a workplace scheme then the minimum contribution from April 2019 is 8% of your income (made up of contributions by you and your employer, plus any tax relief you are entitled to). If you are paying more than 8%, you might have to reduce your contributions to the minimum level for the term of your bankruptcy.
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What happens if I am declared bankrupt and taking a pension income?
When you are declared bankrupt, the official receiver will look at your living costs and any income you are receiving, which includes pension income. If, after your essential costs are covered, there is money left over the receiver will set up an income payment arrangement. This arrangement commits you to making monthly payments for three years. And if you don’t make these payments you could face court action. If you are retired and your only income is the State Pension and pension credits, you won’t have to pay anything extra to your creditors.
Can money be taken from my pension during bankruptcy?
This is where the ifs and buts creep in. There are two main scenarios where money could be claimed from your pension as part of a bankruptcy arrangement.
Your questions answered
Excessive pension contributions
If you pay a lot of money into your pension in the period leading up to your bankruptcy, the official receiver could choose to take this money back out of your pot to help cover your debts. While this is a judgement call on the part of the receiver, pension contributions of more than 15% of your income could be deemed excessive.
Your pension must be registered with HMRC for it to count as an approved scheme. If your scheme is not registered, then the savings in it will not be protected in the event you are declared bankrupt.
I’m thinking of declaring myself bankrupt, what should I do?
However difficult it may feel, your best starting point is to get some clear, impartial guidance and advice. National Debtline and StepChange offer this service free of charge.
* Taking money early from your pension might not be right for you, as it could leave you with less to live on than you need; it shouldn’t be seen as an easy way to raise money. That’s why it makes sense to get financial advice before making any big decisions.