Part 2: Pensions in cases where the bankruptcy petition was presented before 29 May 2000
The following information applies only to cases where the bankruptcy petition was presented before 29 May 2000.
When a bankrupt/former bankrupt is entitled to pension benefits and the bankruptcy petition was presented before 29 May 2000, or where a case with an unrealised vesting pension is handed back by an IP trustee, the case should be passed to the LTADT Pensions Team in line with the following guidance:
The bankrupt may be in receipt of, or at some future date will receive, lump sums and regular payments from a variety of pension arrangements. In some cases these benefits or rights will vest in the bankrupt’s trustee who will have to decide how to deal with them. Where the pension rights and benefits vest, the trustee has no better title to the asset than the bankrupt. In practice this means that the trustee must wait until the bankrupt reaches the earliest retirement date under the terms of the scheme before any benefits can be realized. As the benefits vest, realization can take place after the bankrupt has been discharged. There are three main categories of pension provision for an individual:
Almost all bankrupts will be entitled to receive a state pension on reaching the state pension age (which is currently 65 for men and 60 for women - women's state pension age will start to change to 65 gradually from 2010 - see thepensionservice.gov.uk/.../) State pensions, like other state benefits and allowances, do not form part of the bankrupt’s estate.
If a bankrupt is undischarged (which is unlikely in pre WRPA cases) and is in receipt of a state pension, payments can be included in any calculation for an income payments agreement or income payments order. The official receiver should only consider accepting an income payments agreement or applying for an income payments order where the bankrupt's sole or main income is from a state pension in exceptional circumstances. (See CHM part Income Payments Agreements and Income Payments Orders for guidance concerning income payments agreements and income payments orders).
An occupational pension scheme is a pension scheme generated by a company or organization for the benefit of its employees. Upon the making of a bankruptcy order, the bankrupt’s right to receive a pension from an occupational pension scheme (subject to the validity of any forfeiture clause – see Technical Manual paragraph 61.65) form part of the bankrupt’s estate.
The bankrupt’s rights under an occupational pension scheme can be divided into three categories:
Between the date of the bankruptcy order and the date of discharge it is possible to claim contributions made to the scheme as after acquired property. However, a claim would have to be made within 42 days of each and every contribution. It is not recommended that the official receiver claims future rights in this way
Some pension schemes seek to prevent the benefits being collected by the trustee by means of a clause inserted in the scheme. These clauses are normally well constructed in occupational schemes and the trustee will not usually seek to challenge their validity unless the clause was added to the scheme rules after the date of the bankruptcy order. The pension in a scheme with a valid clause may not be treated as an asset in the bankruptcy.
A forfeiture clause that states specifically that any pension rights will be forfeit on the making of a bankruptcy order against a member is valid and the official receiver/trustee should not seek to challenge it (provided it was introduced into the scheme rules before the date of the bankruptcy order). However, a general clause which states only that pension rights and benefits will be forfeit on an attempt to assign those rights can be challenged by the official receiver as there is no assignment of property on bankruptcy, the property vesting in the trustee without the need for assignment under s 306(2) of the Insolvency Act 1986.
Public sector schemes, which are established and governed by specific Acts of Parliament peculiar to each of them, may contain a statutory provision to prevent the benefits vesting in the trustee although this does not include the schemes set up for the Armed Forces or the Civil Service, which do not contain a valid forfeiture clause. However, if the benefits were awarded to the recipient under the Naval, Military and Air Forces Etc (Disablement and Death) Services Pensions Order 1993 because he/she was injured on active service, the official receiver should not claim the award.
Generally, a forfeiture clause will operate so that a member of the pension scheme will forego all benefits that would have been available to them under the scheme and it will then be up to the trustees of the scheme to deal with those benefits as they see fit, for example, by passing the benefits onto the member’s dependants.
Once the official receiver becomes aware that the bankrupt is a member of an occupational pension scheme with a valid forfeiture clause, he/she should not seek to claim the benefits. For example, the pension schemes for the National Health Service and BT are covered by a valid forfeiture clause and will not vest.
Where the scheme does not have a valid forfeiture clause the official receiver will have notified the bankrupt that the scheme may vest in the trustee and will have obtained further details of the scheme from the pension provider which should be passed on to the LTADT (following the instruction in the introduction above).
If the scheme consists of protected rights only, the official receiver has no claim over the scheme and the bankrupt and the trustees of the pension scheme should be notified accordingly. When the pension comes into payment, if the pension scheme trustees try to rely on a forfeiture clause, the LTADT will make a decision regarding the validity of the clause.
Where the clause is deemed to be valid, the bankrupt and the trustees of the pension scheme should be informed that the official receiver/trustee will have no interest in the scheme.
Where there is no valid clause, the bankrupt and the pension scheme trustees should be notified that the pension vested in the bankruptcy estate when the bankruptcy order was made.
A personal pension plan is an investment policy designed to offer a lump sum in retirement. Plans are available to any UK resident under 75 years old and can be bought from insurance companies, high street banks, investment organizations and some retailers.
Personal pension plans are money purchase arrangements. This means that a member contributes to the plan, the money is invested and a fund is built up. The amount of pension payable depends on the amount paid in, how the investment funds perform and the annuity rate.
The policyholder can elect when the benefits become payable which will usually be some time between ages 50 (From 2010 this rises to 55) and 70, although policies which were taken out before 1988 (described as retirement annuity contracts or RACs) only allow 60 as the earliest retirement age.
In those cases where the bankruptcy petition was presented prior to 29 May 2000, all personal pension policies, with the exception of protected rights, vest in the trustee in bankruptcy following the decisions in Re Landau (a bankrupt) (1997) 3 All ER and Lesser v Lawrence and Denison v Krasner (2000) BPIR 410.
Protected rights arise where the bankrupt has opted out of an employer’s occupational pension scheme and contracted out of the state second pension S2P (formerly SERPS), and has replaced them with a personal pension. That personal pension policy in which the bankrupt has invested funds will attract protected rights to the same level as the S2P would and are treated in the same manner so, accordingly, do not vest in the trustee.
If a bankrupt’s personal pension consists exclusively of protected rights, the official receiver/trustee will not be able to realize the pension and the policy document should be returned to the bankrupt. If the policy only consists of part protected rights, the official receiver should note which portion of the fund does not vest in the trustee and will thus be available to the bankrupt at the appropriate pensionable age.
If the policy has no protected rights, the official receiver should make the bankrupt aware of this so that he/she can seek independent financial advice on the options available which may include setting up a new pension. The official receiver must not advise the bankrupt to stop paying into the existing policy.
Prior to 1996, Inland Revenue (now HM Revenue and Customs) restrictions meant that personal pension policies could not contain forfeiture clauses but the restrictions were lifted and many insurance companies have inserted forfeiture clauses into standard pension policies. However, as these clauses operate so as to put assets beyond the reach of creditors, they are deemed to be a fraud on the creditors and accordingly invalid against a trustee in bankruptcy and the official receiver/trustee should therefore challenge them.
The existence of such forfeiture clauses results in many pension providers disputing the claims made by official receivers for bankrupt’s rights and benefits under personal pension policies. The official receiver should continue to maintain that the personal pension rights and benefits do form part of the estate in bankruptcy and press for the pension provider to note their interest.
Sometimes, a bankrupt may be a member of a group personal pension scheme, which is not an occupational pension scheme but a collection of individual pension arrangements taken out under facilities made available by an employer. This type of pension should be treated by the official receiver/trustee in the same way as a personal pension policy.
When a case is received by the LTADT the pension provider will already have been informed of the official receiver's interest.
The Service has appointed a contractor to deal with the realisation of benefits in vesting pensions, and the pension will be passed by the LTADT to the contractor for realisation.
Where an IP trustee hands back a case with an unrealized pension to the official receiver, the LTADT official receiver should send form RTLUPEN2 to the pension provider(s) to inform them that the case is now being dealt with by him/her and requesting that the pension provider(s) update their records.
Some pension providers may take the view that the official receiver is not entitled to any information regarding the pension plan if it is forfeit due to the bankruptcy and may refuse to provide information. The official receiver should point out to the pension provider that once the bankruptcy order had been made, the pension policy formed part of the bankruptcy estate and the official receiver is therefore entitled to the information requested. This remains true regardless of whether there is a forfeiture clause in the policy. The official receiver may obtain from the bankrupt a written authority for disclosure of the information from the pension provider. However, when this authority is forwarded to the pension provider, the official receiver must explain that he/she does not accept that the authority is necessary to obtain the information.
If the information is still denied, the official receiver should draw the attention of the pension provider to the provisions of section 366 of the Insolvency Act 1986, which allows the official receiver to apply to the court to summon before it any person able to give information concerning the bankrupt or his/her affairs. These provisions should only be brought to the attention of the pension provider if the official receiver intends to make an application to the court.
Where can I find out more?
Case Help Manual
Insolvency Service LeafletUseful sources of information:
Forms to be used - Bankruptcy:
RTLUPEN 1 - notice to pension company when pension comes into payment
RTLUPEN2 - notice to pension provider when RTLU receives a case with an unrealized pension from an IP
Procedure B - Pensions in cases where the bankruptcy petition was presented before 29 May 2000
Occupational pension scheme
Personal pension scheme
1. LTADT will appoint contractor to realise pension benefits
2. Distribute funds and conclude case.