This is a slight departure from the style of updates I have used previously, which have been designed more to provide you with short and to the point pieces of information.
There are some aspects of pensions that cannot be dealt with in such a short and to-the-point manner, and this sees the first of more detailed mailings dealing with specific topics – this first one is based upon the Pensions and Bankruptcy rules.
The Pensions on Divorce (Provision of Information) Regulations require the disclosure of whether a pension arrangement is subject to either a forfeiture or bankruptcy order but how does the bankruptcy order affect the pension arrangement?
Prior to the introduction of the Welfare and Reform Pensions Act 1999 (WRPA) Section 11 on 29 May 2000 there was a lot of uncertainty relating to the legal position of pensions after the making of a bankruptcy order.
For petitions for bankruptcy made on or after 29 May 2000 the position was clarified that benefits under an ‘approved pension schemes’ would not vest with the Trustee in Bankruptcy (TIB).
However, for any benefits that vested with the Trustee in Bankruptcy before 29 May 2000 they will still be payable to the Trustee in Bankruptcy and not the member. How they will be treated will depend on the date that the petition for bankruptcy was made.
Petitions made after 29 December 1986 but before 29 May 2000
The assignment of benefits is not normally permitted by a UK approved pension scheme but in the case of Re Landau (1996) the Court decided that the property vests in the Trustee in Bankruptcy automatically by the action of law (Section 306 of the Insolvency Act 1986) and does not rely on any assignment. The Landau case was in respect of a retirement annuity contract.
Following the Landau case, many insolvency practitioners re-opened bankruptcies back to 1986 (when the Insolvency Act came into force) and claimed the pension assets.
Many private sector occupational pension schemes contain protective provisions intended to prevent a Trustee in Bankruptcy claiming a member’s pension benefits. Usually the rules provide for a member’s benefit to be forfeited with the trustees having discretion to pay the forfeited benefits to the member, his or her spouse or dependants. These protective provisions were effective if correctly drafted.
During 1997, the Inland Revenue advised that they would no longer object to personal pension schemes including a forfeiture rule similar to that contained in some occupational pension scheme rules. Many providers added such a rule to their personal pension plans, however the effectiveness of these rules has yet been tested in court.
As the benefits have vested in the Trustee in Bankruptcy they control the benefits and can:
- Require payment of benefits at any time permitted by the scheme rules
- Require payment of a transfer value (e.g. from a retirement annuity to a Personal / Stakeholder pension plan in order to draw retirement benefits between 55 and 60.
It follows from this that the member does not have any entitlement to information, or the authority to request payment of benefits.
Petitions made after 29 May 2000
If the bankruptcy petition is filed after 29 May 2000 by virtue of Section 11 of the Welfare Reform and Pensions Act 1999 then the general rule is that a person’s pension and lump sum rights under a registered pension arrangement will not vest in the Trustee in Bankruptcy. In short, pension benefits are protected from creditors but it is important to remember that the Trustee in Bankruptcy can ask the court to consider if contributions made to the pension were excessive and were made for the purpose of avoiding paying creditors (see below for details).
A Trustee in Bankruptcy may still apply to the Court for an income payments order where the pension is in payment or comes into payment before the bankrupt is discharged. However, income payment orders cannot be made after discharge.
The maximum length of the order is three years and an “attaching” spouse’s pension.
Excessive contribution orders
Section 15 of Welfare Reform and Pensions Act 1999 came into force on 6 April 2002, and added new sections 342A to 342C of the Insolvency Act 1986 dealing with the recovery of excessive contributions.
A Trustee In Bankruptcy the right to apply for a court order to recover contributions paid to the scheme deemed to be inappropriate in the individual’s circumstances and to have “unfairly prejudiced” the individual’s creditors.
The order can cover contributions made to approved and unapproved pension arrangements by the individual or employer. ‘Approved pensions arrangements’ is defined by reference to Section 11 WRPA, and so means pension schemes registered under Finance Act 2004.
Excessive contribution orders can, where it is considered appropriate by the court, be made against any scheme that holds pension rights following pension sharing on divorce. If the Court is satisfied, it may make such order as it sees fit to restore the position. The Court may:
- Require the pension arrangement concerned to pay an amount to the Trustee in Bankruptcy.
- Reduce the benefits payable from the arrangement to the individual and the benefits to which their spouse and dependants may be entitled.
- Require the costs of the pension arrangement supplying the information to the Court to be net.
Where the Court makes a restoration order for the recovery of excessive contributions, it will be sent to the trustees or managers of the bankrupt’s pension scheme. They must comply with the order within 17 weeks of receiving it.
Pension sharing on divorce
Where an ex-spouse is entitled to an undischarged pension credit against the persons responsible for the pension arrangement, s.11 (12) of WRPA 1999 ensures that, for the purposes of pensions and bankruptcy, the ex-spouse is treated as having rights under that arrangement and is therefore protected. Where the ex-spouse is in receipt of a pension credit (i.e. it has been converted into rights under the member’s scheme or another pension scheme) it will then be protected provided that the scheme is an approved pensions arrangement.
What happens when the bankrupt is discharged
It is a common misconception that assets not sold by a trustee are returned to the bankrupt, but this is not the case. Once property has vested in a trustee, it does not revert to the bankrupt on discharge. It remains the trustee’s property. It may therefore be that a pension which has passed to a trustee is realised the trustee many years after the bankrupt has been discharged. However, a trustee can relinquish his interest in an asset if, for example, the bankrupt buys it out.
Pensions already in payment
A Trustee in Bankruptcy may have applied for an Income Payment Order for the income of a bankrupt and this could include a pension in payment or a plan taking income withdrawals. The order must leave the bankrupt and their family with sufficient income to live by reasonable means. Income payment orders require payments specified in the order to be made directly to the Trustee in Bankruptcy.
If a bankrupt has opted for a retirement date later than the earliest available under the pension policy or occupational pension scheme, the Trustee in Bankruptcy can seek to amend the date to take the pension from the earliest date where the pension benefits have vested in the Trustee in Bankruptcy.