What happens your pension in a bankruptcy?

Pensions and bankruptcy comprise a very complex interface of pension legislation, bankruptcy acts and tax legislation.

The Personal Insolvency Act 2012 introduced two new provisions into the 1988 bankruptcy Act relating to pensions on bankruptcy. Section 44A of the Bankruptcy Act now provides that assets under a relevant pension arrangement (other than payments already received or which the bankrupt was entitled to receive) shall not vest in the Official Assignee. A relevant pension arrangement is defined in the section and includes a retirement benefits scheme, retirement annuity contract, PRSA, overseas pension plan etc.

Section 44A goes on to provide that if the bankrupt is entitled to perform an act or exercise an option under the relevant pension arrangement which will result in the bankrupt receiving any amount of money (i.e. a pension or lump sum), that amount of money shall vest in the Official Assignee. In addition, the Official Assignee will be entitled to perform that act or exercise that option on behalf of the bankrupt. This will apply to acts which can be performed or options which are exercisable by the bankrupt prior to or at the time of the bankruptcy or at any stage within 5 years of the bankrupt being adjudicated bankrupt.

A newly inserted section 44B deals with excessive pension contributions made by a bankrupt in the 3 years prior to being adjudicated bankrupt. Where the Court is satisfied that such excessive contributions have been made, it may make such order as it considers appropriate for the purposes of vesting the excessive contributions in the Official Assignee and making them available to the creditors of the bankrupt. In considering whether or not the contributions to the relevant pension arrangement were excessive, the Court will have regard to, amongst other things, the extent to which the bankrupt was obliged to make such contributions, the age of the bankrupt at the time and the percentage limits applying to those contributions for the purposes of tax relief.

The Court also has the power to make Bankruptcy Payment Orders directing any person from whom the bankrupt is entitled to receive any pension to pay the pension directly to the Official Assignee or trustee. However, reasonable provision must be made for Reasonable Living Expenses. In addition, a spouse may be able to make a claim for a beneficial interest in a pension fund.

It is very difficult to provide definitive advice on pensions in a bankruptcy as there has been only one High Court judgment on the matter since 2012. On the 25th October 2017 the High Court gave judgment in the case of “Estate of Coady”.

The Coady case was brought by the Official Assignee in order to seek Directions of the Court on what rights, if any, vested in the Official Assignee in relation to the bankrupt’s Pension. The bankrupt himself took no part in the proceedings. Aviva and the Revenue Commissioners were notice parties and made submissions in relation to the issues arising.

The issue for decision in this judgment is what rights, if any, vested in the Official Assignee in relation to the Personal Pension Policy upon the adjudication of the debtor as a bankrupt. The judgment held that:

  • The Official Assignee was entitled to claim the 25% lump sum that the bankrupt was entitled to draw down.

 

  • The Official Assignee may only make a claim on the annual pension income by making an application to court for a Bankruptcy Payments Order. Under such a process the Court must be satisfied that the bankrupt has enough income to satisfy Reasonable Living Expenses.

Whilst the Coady judgment has provided some clarification on the implications of bankruptcy on a pension, there are many other areas which are still unclear.

The long awaited Court of Appeal’s decision in the UK  in Horton v Henry  (delivered October 2016) has clarified two conflicting lines of UK case law, holding that an “income payments order” (sought by a trustee in bankruptcy over a bankrupt’s income) cannot extend to an as yet unexercised right to draw a pension. Even where a bankrupt is able to demand immediate payment of an uncrystallised pension, a trustee in bankruptcy cannot compel them to do so and their undrawn pension assets remain “safe” from creditors.

As mentioned above, it will take more Irish High Court cases to provide guidance, as we do now have substantially different legislation from the UK.

If you have a significant pension fund that you would like to protect from a bankruptcy procedure please contact us for expert advice.

For further information please contact Jim Stafford or Tom Murray on 01 661 4066 or by email: jim.stafford@frielstafford.ie and tom.murray@frielstafford.ie