Pensions - General Background

PART 1

December  2012

PENSIONS -  GENERAL BACKGROUND 

61.2  Pensions and bankruptcy

In any case where the bankruptcy order was made on a petition presented on or after 29 May 2000, all approved pensions arrangements will not form part of the bankrupt’s estate (see Part 2).

Pensions in all earlier cases will, for the most part, form part of the bankruptcy estate (see Part 4), though see paragraph 61.52 regarding cases where the orders were made under the Bankruptcy Act 1914.

 

61.3  Pensions operated by an insolvent

Guidance on dealing with a pension scheme operated by an insolvent as an employer for the benefit of employees is provided in Part 6.

 

61.4  Types of pensions

There are a number of different types of pensions; the following are the ones that the official receiver is most likely to encounter:

 

61.5  Occupational pension scheme (amended August 2013)

An occupational pension scheme is one set up by an employer for the benefit of its employees and provides members with retirement and death benefits.   Contributions to the scheme are generally deducted at source, and may be supplemented by the employer.  The scheme may operate on the basis of defined benefits (where the benefits are paid as a proportion of the final or average salary of the member), or defined contribution (also known as money purchase), where the contributions made by the member are used to purchase an annuity on retirement (see paragraph 61.18).

The scheme may be administered by pension trustees or by a financial services company.  Retirement age is dependent on the scheme rules, but cannot be before age 60.

See Part 5 for guidance on occupational pension schemes operated by the insolvent.

 

61.6  Personal pension plans

A personal pension plan (PPP) is an investment policy designed to offer a lump sum and income on retirement. 

A PPP is provided by a financial services company (including banks, building societies and insurance companies) and is a money purchase arrangement. This means the monies invested (usually on a monthly basis) are used to provide an annuity (see paragraph 61.18) and a lump sum on retirement.  The lump sum is a maximum of 25% of the pension fund value.  The earliest retirement age in a PPP is 55.

 

61.7  Personal pension plans – amount payable

The amount of pension paid to a member on retirement will depend on: 

  • The amount paid into the PPP.
  • How well the investment performs.
  • The annuity rate (see paragraph 61.18) at the date a person retires.

 

61.8  Retirement annuity contract

Prior to June 1988 (the date that PPPs were introduced), individuals not in occupational pension schemes and those self-employed (and paying UK tax) were able to invest monies in a retirement annuity contract (RAC).  RACs took on largely the same features as PPPs from April 2006.

 

61.9  Stakeholder pensions

Stakeholder pensions are a form of PPP, offered by an employer to its employees.  They are structured in such a way as to make them low cost and flexible.  The management charges that can be applied by the provider are limited and the flexibility derives from the ability to switch providers without penalty, to start contributions at a low level and to stop and start contributions as circumstances dictate. 

An employer with five or more employees and no occupational pension scheme has to offer its employees access to a stakeholder pension scheme.

 

61.10 Workplace pensions

Workplace pensions are not a pension schemes in their own right; rather it is a government scheme requiring an employer to enrol its employees in a pension scheme.  The pension scheme to which the employees are enrolled may be a stakeholder scheme (see paragraph 61.9), or an occupational pension (see paragraph 61.5), with deductions being made out of the employees gross salary.  The employee has the opportunity to opt out of the enrolment, should he/she wish.  The scheme is being phased in from October 2012, depending on the size of the employer – with the largest employers first. 

 

61.11  Self invested personal pension plans

As the name might suggest, a self invested personal pension plan (SIPP) is a type of personal pension plan (PPP) (see paragraph 61.6).  It differs from a PPP in that it allows a greater flexibility as regards investment opportunity and it allows the member to borrow against the fund for further plan investments.  Whereas a PPP is generally structured so that the plan holder pays a regular contribution to the financial services company for that company to invest, a SIPP allows the plan holder to choose his/her own form of investment, which may be, for example, shares, property, cash savings, antiques or vintage cars.

The official receiver should look closely at a SIPP held by a bankrupt to ensure that it has not been used as a vehicle to transfer assets out of the reach of creditors (see Chapter 31.4B, Part 9).

 

61.12  State pension

The state pension is a pension provided by the state that is intended to provide a basic income in retirement.  The date at which a person becomes eligible to draw the state pension varies depending on when they were born (see HERE).  The amount payable is dependent on a number of factors (see HERE).

A state pension cannot form part of a bankrupt’s estate, no matter when the date of the bankruptcy petition is [note 1].

 

61.13  Second State Pension

The Second State Pension (S2P) provides a top-up to the basic state pension based on the individual’s earnings and is based upon earnings on which standard rate class national insurance is paid (see paragraphs 77.39 to 77.40].  Contributions to the S2P are compulsory unless the individual has made alternative arrangements through a personal (including stakeholder) or occupational pension scheme – though this is only allowed if the alternative arrangement is on a defined benefit (see paragraph 61.71) basis.

S2P is also known as Additional Pension and forerunners of S2P were the State-Earnings Related Pension Scheme (SERPS) and, before that, the Graduated Retirement Benefit.

 

61.14  A pension administered outside the UK

A pension arrangement administered outside the UK is unlikely to have achieved the necessary UK tax-approval to qualify it as an approved pension that would be excluded from the estate (see paragraph 61.21).  The exception to this is an occupational pension scheme set up by a government outside the UK for the benefit, or primarily the benefit, of its employees, which is automatically excluded from the estate [note 2].

If the pension is held in another European Union (EU) country, the guidance at paragraph 61.39 should be followed.  Otherwise, the official receiver, as trustee, will need to consider the value of the pension against the likely costs of obtaining the orders required to deal with the pension (see Chapter 42).  The cost of such an order is likely to be prohibitive and the best way to deal with the pension interest is likely to be to enter into a qualifying agreement with the bankrupt (see Part 3).

 

61.15  Pensions and divorce – pension earmarking

Generally, a spouse’s or civil partner’s right to a pension in a divorce/dissolution settlement will be protected by the court making a special attachment order known as an ‘earmarking’ order [note 3].  This order will require the pension provider to make some form of payment (specified at the time of the divorce) to the former spouse/civil partner when the pension benefits are payable.  Either party can subsequently apply to the court to have the amount varied.

A bankrupt’s right to benefit from such an order will be excluded from the estate if the order was made on a petition presented after 29 May 2000 (see Part 2), otherwise the rights under the order would vest in the estate.

 

61.16  Pensions and divorce – pension sharing

The other form of pension protection in divorce is pension sharing (where the pension ‘pot’ is split on divorce). This will provide both parties with their own pension for the future.  This scheme did not come into force until December 2000 [note 4], and has no retrospective effect, so any pension sharing arrangement will affect only excluded pensions.

 

61.17  Transfer fund value and cash equivalent transfer value

The transfer fund value is the cash value of the pension, and is simply the value of accumulated funds and associated benefits.

The cash equivalent transfer value, of a pension is the expected cost of providing the member’s benefits within the scheme, – generally, this will be in relation to an occupational pension scheme.  Depending on the type of scheme this may simply be the value of accumulated funds, or may require some more complicated calculations related to assumptions regarding events affecting the scheme.

The relevance of the fund transfer value for the official receiver, as trustee, will be in the realisation of a vesting pension scheme (see paragraph 61.56).

 

61.18  Annuity

Most defined contribution pensions (see paragraph 61.71) operate in the way that the funds invested in the pension accumulate and, at the time that the pension holder wishes to draw down the benefits they will use the accumulated funds to take a lump sum and/or purchase a separate policy known as an annuity.  The annuity is simply a policy that provides for periodic payments to the individual until a defined date/event – generally the death of the policy holder.

Defined benefit schemes (see paragraph 61.71) operate similarly (in that they provide for a lump sum and periodic payments), but there is 31.5, Part 2.

 

61.18a Trivial commutation of a pension (triviality rules) (amended December 2013)

A member of a pension scheme is entitled to take their entire pension as a lump sum (known as a trivial commutation lump sum) where [note 5]

a) it is paid when no trivial commutation lump sum has previously been paid to the member (by any registered pension scheme) or, if such a lump sum has previously been paid, it has not been paid within the previous 12 months,

b) on the nominated date, the value of the member’s pension rights does not exceed the commutation limit (which is currently £15,000, but reducing to £12,500 from 6 April 2014 – see HERE),

c) it is paid when all or part of the member’s lifetime allowance (allowance is currently £1,500,000 but reducing to £1,250,000 from 6 April 2014 - see HERE) is available,

d) it extinguishes the member’s entitlement to benefits under the pension scheme, and

e) it is paid when the member has reached the age of 60 but has not reached the age of 75.

 

61.19  Income drawdown

An income drawdown plan (also known as an unsecured pension) is where the pension-holder leaves the funds invested in the pension policy and draws an income from that fund.

 

61.20  Pension terms and ‘jargon’

The website of the Pensions Advisory Service contains a glossary that official receivers may refer to if they encounter a term relating to pensions that they are not familiar with:

http://www.pensionsadvisoryservice.org.uk/

The glossary is at the bottom of the homepage.

 

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