If you have been declared bankrupt, then all of your finances are likely to be affected. Bankrupt people are allowed sufficient finances for their day-to-day living expenses, so long as they’re deemed to be reasonably necessary. The official receiver will have the right to instruct you on any payments you receive that are above what is necessary for day-to-day living. In theory, any sums you receive following a bankruptcy order should go to your creditors and a payment arrangement may be put in place to cover them.
Please note that payment arrangements can continue to be binding even after your bankruptcy period – typically twelve months – has come to an end. Consequently, your pension payments can be affected. Any annuity you might have from your pension pot could form part of a payment arrangement. Therefore, we would recommend talking to our professional insolvency practitioners long before you apply for bankruptcy, especially if you are in receipt of a private or company pension.
There are some pension schemes that HMRC does not approve of. If you have been paying into one of these, then your pension may not be protected in the usual way when applying for bankruptcy. In addition, if you have been judged to have made ‘excessive payments’ into your pension just before you apply for bankruptcy, then the official receiver may reverse them. In other words, you shouldn’t use your pension to try and protect some of your liquid assets prior to bankruptcy.
Of course, bankruptcy can affect employees, too not just company directors. Their pension rights should be protected in law but the fact that their employer has become insolvent will often change the way their pensions are calculated. One of the ways that employees are protected in UK law is that company pension schemes are not usually considered to be part of a company’s assets. As such, they should be untouched as part of the bankruptcy process. However, all circumstances are different and it depends on exactly how the company concerned has dealt with its finances.
Employees should not assume, therefore, that their pension is protected simply because it is not to be considered a company asset. That said, employees who have personal pensions are protected since these are their individual assets. Only company directors need to seek professional advice under these circumstances.
When an insolvency practitioner is appointed to handle the company’s pensions on behalf of the official receiver, he or she is obliged to give notice of the bankruptcy proceeding to the Pensions Regulator. Not only that, but they are duty bound to inform the Pension Protection Fund as well as the trustees or managers of the pension scheme concerned. In some cases, employers may have deducted pension contributions from employees’ payslips but failed to add them to the pension scheme. If this is the case, then the unpaid contributions must be classed as a preferential debt. This means they will be among the first debts to be paid from the firm’s remaining assets.