FAQ – Pensions in bankruptcy
These FAQs are to assist official receivers in understanding the subject and should be read in conjunction with the more detailed guidance given in the main body of the Technical Manual chapter. Links to the relevant parts of the Technical Manual are given within the FAQs.
I thought that pensions were excluded from the bankruptcy estate?
All approved pensions in cases made on a petition presented on or after 29 May 2000 are excluded from the bankrupt’s estate. This includes not only the pension fund itself, but any related rights such as the right to receive a death benefit or the right to bring a legal claim in respect of the pension (see paragraph 61.21).
What is an approved pension?
In essence an approved pension is one that has been approved by HMRC as being tax compliant (see paragraph 61.27).
How will I know if a pension has been approved by HMRC?
We take the position that a pension with a recognised national provider or a recognised national employer will be tax approved. If you are unsure, you can send a letter to the provider to enquire (see paragraphs 61.28 to 61.29).
If the pension is approved, what should I do?
Nothing really. You have to inform the pension provider and the bankrupt that the pension is excluded from the estate (see paragraph 61.30).
Is there any way that the benefits of an excluded pension can be realised?
Not directly but, if the pension is due to come into payment within three years of the date of the bankruptcy, the official receiver, as trustee, should seek to enter into an IPA for any surplus pension income (see paragraph 61.25).
What if the pension is unapproved?
Unapproved pensions are very rare, but if you do encounter a pension that is unapproved, it will vest in the official receiver as trustee of the bankrupt’s estate as an other type of asset.
What should I do with an unapproved pension?
You should notify the pension provider and bankrupt of the official receiver’s interest in the pension. Unless the bankrupt wants to enter into a qualifying agreement, the pension would then be passed to the LTAU to monitor and realise as appropriate.
What is this ‘qualifying agreement’ of which you speak?
A qualifying agreement is an agreement between the bankrupt and his/her trustee in bankruptcy that the pension will be excluded from the estate. Depending on the value of the pension fund and the pension provision available for the bankrupt and his/her dependents, the trustee should look for some payment to be made into the estate in return for entering into the qualifying agreement (see paragraph 61.35).
Is there a time limit to enter into a qualifying agreement?
A qualifying agreement must be entered into within nine weeks of the vesting of the bankrupt’s estate in the trustee or the date that the pension ceased to be an approved pension. This time limit is not able to be extended (see paragraph 61.38).
What if the trustee does not enter into a qualifying agreement?
The bankrupt can apply to court for an order that his/her pension is excluded from the bankruptcy estate. He/she has 13 weeks from the date that the pension vested in the trustee to apply for such an order. The bankrupt can apply for such an order before, after or instead of attempting to enter into a qualifying agreement with the trustee (see paragraph 61.47).
I have a bankrupt with a pension that is administered in another EU country. What do I do about this?
A pension administered in another EU country is unlikely to have sought, or received, HMRC approval and is therefore considered to be unapproved and forms part of the bankruptcy estate (see paragraph 61.14).
Unapproved pensions are assets of the bankruptcy estate, so would I send it to LTAU for them to realise in due course?
No. The Service is concerned to ensure that EU citizens that have exercised their right to free movement within the EU are not disadvantaged by the operation of UK law and we would not seek to realise the pension (see paragraph 61.39).
Why don’t we realise the pension?
We would take the position that a person that has a pension that is tax-approved in its own EU country should be treated the same as a pension approved in the UK. Since the law operates to vest the pension in the official receiver as trustee, we have to find some other way of dealing with the pension (see paragraph 61.39).
How would I know if the pension has been approved in another EU country?
If the pension is with an internationally recognised pension provider or employer, it can be assumed that the pension is approved. Otherwise, there is some country specific guidance in the Technical Manual, and Technical Section can offer advice (see paragraph 61.39).
How do we deal with an ‘approved’ EU pension?
We would deal with an ‘approved’ EU pension by entering into a qualifying agreement with the bankrupt.
Qualifying agreements. I know about those – so, we ask the bankrupt for a payment in return for agreeing that his/her pension is excluded from the estate?
A qualifying agreement is an agreement between a trustee and the bankrupt to exclude the pension from the estate and we would normally seek a payment in return for entering into the agreement. However, to seek a payment in these circumstances would be treating the EU pension-holder differently from how we would treat a bankrupt with a UK approved pension (which is unconditionally excluded from the estate).
If the pension is able to be brought into payment within three years of the making of the order, you should seek an agreement that the bankrupt will enter into an IPA for surplus pension funds in return for entering into the qualifying agreement. This is the same way as we would treat a UK approved pension – in that we would seek an IPA/IPO in relation to pension income (see paragraph 61.41).
And if the pension is not coming into payment within three years?
Then the qualifying agreement would be unconditional (see paragraph 61.41).
Does the time limit for entering into the qualifying agreement still apply to these ‘EU pension’ qualifying agreements?
Yes. The qualifying agreement must be entered into within nine weeks of the pension vesting in the official receiver as trustee (see paragraph 61.38).
What about pensions held outside the EU?
These should be treated as any other unapproved pension.
I have a pension in a case that was made on a petition presented before 29 May 2000. What should I do?
A pension in a case made on a petition presented prior to 29 May 2000 would vest in the official receiver as trustee (or trustee ex-officio). Naturally, the majority of pensions of this type will already be with the Pensions Unit in Canterbury but, if not, you should ensure that the pension provider and the bankrupt are aware of the official receiver’s interest in the pension and then send it to the Pensions Unit (see paragraph 61.53).
What do the Pensions Unit do with these pensions?
The Pensions Unit will establish the value of the pension and offer the (former) bankrupt the opportunity to ‘buy-back’ the pension at 45% of its value. If the bankrupt cannot, or will not, proceed with this the Pensions Unit will claim all of the lump sum and five years of the payments due under the pension. Of course, this cannot be done until the (former) bankrupt reaches an age at which they can claim the pension (which is generally 55) as the official receiver cannot have any better claim to the pension than the (former) bankrupt has (see paragraph 61.54).
Is this the case with all vesting pensions?
For most of them, yes, but if the pension is worth less than £500 the Pensions Unit will make no claim over the pension and if the pension is worth less than £18,000 then the entire amount will be claimed as a lump sum (see paragraph 61.61).
Are there any other exceptions?
Yes. In cases made under the Bankruptcy Act 1914 (essentially, this will be cases made before 29 December 1986), The Service has taken a policy decision not to realise vesting pension benefits. There can be problems obtaining a court order to facilitate the realisation and there are often no records of the creditors in these old cases, meaning that it can be impossible to make a distribution (see paragraph 61.52).