Blog: The grey area of pensions liberation and bankrupts
Eileen Blackburn is partner and head of Business Recovery at French Duncan, and chair of R3’s Scottish Technical Committee
Former pension minister Steve Webb once commented (in)famously that last spring’s pensions’ liberation would enable pensioners to spend their savings on a Lamborghini.
How many Lamborghinis have been snapped up since then is not known, but the latest figures reveal that pension savers withdrew more than £1.8 billion in the first two months of the new retirement freedoms.
The data shows that, during April and May 2015, savers took out more than £1 billion in 65,000 cash withdrawals from UK pension pots. Some £800 million of payments were also taken out by savers from income drawdown policies, in 170,000 withdrawals, according to the Association of British Insurers (ABI).
At present, subject to certain specific exceptions, when an individual is declared bankrupt his personal pension is excluded from the estate – but what remains a grey area is the question of what then happens if a bankrupt cashes in his personal pension during the course of the bankruptcy?
Should these funds still be excluded from the estate? Should the bankrupt be entitled to cash in his pension pot and splash out on a Lamborghini whilst his creditors are not entitled to a penny?
Or might it be regarded as irresponsible on the part of the debtor if he withdrew his pension pot to pay off his creditors because then he might be left with little money for his old age?
These questions aside, there seems to be a strong argument that on bankruptcy, debtors should be compelled to withdraw a proportion of their pension pot to be set aside for the benefit of their creditors, as it does seem inherently unfair that, in some cases, individuals have been able to amass large amounts of credit which is left unpaid when they are declared bankrupt and which, ultimately, the rest of society has to pay one way or another.
Prior to pensions liberation, pensioners could only take a certain amount of cash from their pension and there is an ongoing court case in England to decide on whether an Income Payment Order can be granted in respect of a pension pot which is not yet in payment in order to make a contribution to the debtor’s estate help pay off creditors.
Whilst we await the outcome of the appeal in that case with interest, in order to consider its implications for Scotland, this becomes a much bigger issue in the wake of pensions liberation if debtors can cash in their pension fund in its entirety.
The grey area resides somewhere in the interaction between insolvency and tax law because, according to tax legislation, cash withdrawn from a pension pot is classified as income and, as such, insolvency practitioners would be seeking a contribution from income. This matter is not settled – there is a school of thought which suggests it is capital and, as such, the pension pot would vest in the Trustee in its entirety.
Ultimately, this question remains an unresolved policy issue, but what the government plans to do about it remains unknown at present. As far as the insolvency profession is concerned, the Accountant in Bankruptcy, responsible for administering the process of personal bankruptcy and recording corporate insolvencies in Scotland, should be advising practitioners about this issue.
Meanwhile, since pensions liberation, it is being reported that some pension companies are seeking to charge high administration fees for policyholders wishing to cash in some or all of their pension pot. Whilst the government has made it legal for people to draw their money down from their pensions, they have not as yet instructed pension companies that they are obliged to do so.