According to recent figures from the Insolvency Service, individual insolvencies are on the rise, which could lead to a hole in retirement savings if the individual has not been saving under an approved pension scheme.
The figures show that individual insolvencies in the second quarter of this year were 27 per cent higher than in the same period a year ago, continuing the general upward trend seen since 2015.
This has led to fears that the insolvent individual’s pension might be taken to go towards their debts. However, in most cases this could not happen because there is a statutory bankruptcy protection in force that applies to most pension funds.
The protection was introduced by the Welfare Reform and Pensions Act 1999 and means that a trustee in bankruptcy cannot access the funds while the individual remains in an approved pension scheme such as an occupational scheme or a personal pension.
The key word here is ‘approved’, which means any scheme that is registered with HM Revenue & Customs (HMRC), but might not apply to unregistered schemes, such as Employer Financed Retirement Benefit Schemes (EFRBS).
However, a trustee in bankruptcy still has room to manoeuvre, as they can apply to the court to get any ‘excessive’ contributions they believe the individual made to their pension prior to the bankruptcy back from the estate.
There is no definition of ‘excessive’ but if the contributions prejudiced the individual’s creditors and were made at the expense of essential outgoings for the person’s business or home, the court might consider this.
Meanwhile, another option could be for the trustee in bankruptcy to take out an income payments order, which is where the court grants an order over ‘surplus’ income that is over the amount the individual might reasonably need to live.
To find out more about how Kirk Newsholme Financial Planning can help, please contact Richard Leonard at Richard.Leonard@knfp.co.uk or by calling 0113 204 4215.