Pension Freedom, pension funds and bankruptcy

Pension Freedom, pension funds and bankruptcy

Back in the old days, (before Pension Freedoms), one of the standard arguments to pay into a pension, other than the obvious one of having an income in retirement, was to protect some of your accumulated assets from a potential bankruptcy. This was particularly important for sole traders, who may in a bankruptcy situation would otherwise lose everything.

Conventional wisdom was that before the Normal Retirement Age, the fund was inaccessible to a Trustee in Bankruptcy, as the fund did not form part of the bankrupt’s assets and there was no entitlement to income. Where the bankrupt was older than Normal Retirement Age, a Trustee in Bankruptcy could apply for an Income Payments Order, (IPO), but that would be limited to a proportion of the income actually received by the pension member, based on a purchased annuity, for the remaining period of the bankruptcy.

So long as the bankrupt had not done anything illegal, like making payments to the pension while insolvent, a considerable proportion of someone’s pension money was protected for spending in later life.

More recently, there are two flies in the ointment; -

Raithatha v Williamson, (2012), a case decided in the High Court, held that undrawn pension could be included in an IPO. It also concluded that any lump sum payments which the bankrupt could opt for under the pension rules would be treated as income, as well as actual pension payments. This implies that anyone over Normal Retirement Age with a pension fund and a bankruptcy order could be forced to draw on the pension.

Pension Freedom; gives the pension member the right to draw all of the funds out as income in one go at 55 years or older, or spread it out as income over many years or even go and buy an annuity.

It does not take a genius to work out the implications; if Raithatha v Willimson becomes the final precedent, if you are bankrupt and older than 55, the Trustee in Bankruptcy could use all of your money purchase pension funds to pay down your debts, leaving you potentially with no money whatsoever.

All is not lost; both we as advisers and potential bankrupts need to keep an eye on developments; a High Court case in 2014, (Horton v Henry), held that undrawn pension funds were not funds to which the bankrupt individual was entitled, so could not be made subject to an IPO, restoring the pre-2012 situation. More recently, Hinton v Wotherspoon in the High Court stated that the approach in the Horton v Henry case was ‘plainly correct’. As Horton v Henry is being appealed, we must await developments; the implications could be very far-reaching.

If you would like to know more about how we can help you plan and realise your financial goals then contact us at or call us on 01223 792 196.

The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.