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Private pension pots of bankrupt individuals can be used to settle debts, High Court rules

Money sitting in untouched private pension pots of bankrupt individuals can be used to pay off debts owed to creditors if those individuals are old enough to draw the pension, the High Court has ruled.11 Apr 2012

The Court said that if a bankrupt person is of an age where they are entitled to draw from their private pension pots and had not done so creditors can force them to use that money to pay off their debts.

Mr Justice Livesey QC said the untouched money would be considered as an income payment under the terms of the Insolvency Act and could therefore be used to repay creditors. Private pension pots had previously generally been considered immune from creditors looking to obtain money owed to them by bankrupt individuals.

“Why should it be that a person who elected on the day preceding his bankruptcy should be in a position where his entitlement to enjoy the fruits of his pension is liable to be subject to right of the Trustee to apply for it to go to his creditors … whereas the person who had not yet done so is immune from the impact of the section and can enjoy the full fruits of his pension to the detriment of his creditors?” Mr Justice Livesey QC said in the ruling seen by

"By using the word 'immune' I mean that, such a bankrupt could avoid losing any part of his pension simply by choosing – for whatever reason – not to issue an election until the date of his discharge. I can think of no reason or policy, nor has one been suggested to me in argument, why the legislature should have legislated in order to create such an anomaly."

"It cannot be to the benefit of the bankrupt's creditors; the creation of such an anomaly would be to discriminate in favour of a class of bankrupts, those who happened not to have made an election, without (so far as I can see) any reason or justification," the judge said. "A bankrupt does have an entitlement to a payment under a pension scheme not merely where the scheme is in payment of benefit but also where, under the rules of the scheme, he would be entitled to payment merely by asking for payment".

Pensions expert Simon Tyler of Pinsent Masons, the law firm behind, said the ruling was bad for pensions savers.

“Individuals usually think that the money they put into a pension scheme will be out of any creditors’ reach if they become bankrupt," Tyler said. "That is generally true for individuals who are not yet drawing a pension from the scheme."

"This case indicates that a court may force individuals to draw a pension if the pension scheme permits this.  Many pension schemes give their members this right from age 55.  The reasoning in this case means that the pension savings of many individuals will only remain protected on bankruptcy as long as they are under age 55.  That is a new, unwelcome, development for pension savers," he said.