Retirement savers with financial problems are barred from declaring bankruptcy or seeking a debt relief order if they can access a pension to clear what they owe.
From April 6, anyone aged 55 years old or over who can legally draw cash from their pension is subject to the new guidance from the government’s Insolvency Service.
The guidance follows two cases that have shaken up insolvency issues for retirement savers.
Judges in the first case ruled trustees could force a retirement saver in debt to hand over their pension to pay off any debts.
This decision was overturned by a second case. This time, the judges decided trustees could not access a pension savers fund if the pension was not in draw down.
The case is currently awaiting a ruling from the Court of Appeal.
Debts come first
Meanwhile, the insolvency Service has issued guidelines allowing the courts to stop anyone aged over 55 applying for bankruptcy if they have an untouched pension.
This decision stops anyone with an uncrystallised pension from declaring bankruptcy or applying for a debt relief order to evade settling their debts if they have the cash stashed in a pension fund.
“We view this as a measure to stop people evading their debts pending the decision from the Court of Appeal.,” said an Insolvency Service spokesman.
“If this rule is not followed, then a trustee may have to take court proceedings to revoke a bankruptcy or debt relief order if it later transpires the debtor had the money in a pension which could have cleared what they owe.”
The guidance also suggests trustees should argue that debtors should not be able to fund a pension at the expense of paying their debts.
Legal limbo
“This does not mean someone in bankruptcy must not save for their retirement, but does mean that if the amount they are saving is to the detriment of their creditors, the trustee should challenge the contributions,” said the spokesman.
The guidance leaves insolvency practitioners in a legal limbo, as they could argue against debtors making pension contributions only to find the Court of Appeal rules that the guidance is wrong.
Also, the case may not end with the Court of Appeal ruling as a further appeal to the Supreme Court may be open.
The guidance applies to all defined contribution and defined benefit pensions.
