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The guidance in this part applies only to cases where the bankruptcy petition was presented before 29 May 2000.
When the official receiver is dealing with a case where the bankruptcy order was made on a petition presented before 29 May 2000 when the main provisions of the WRPA99 came into force, part or all of the bankrupt's pension may be claimed by him/her as trustee whether the bankrupt was in receipt of pension payments at the date of the bankruptcy order or whether he/she is due to receive payments in the future.
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:
State pensions
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 www.thepensionservice.gov.uk ) State pensions, like other state benefits and allowances, do not form part of the bankrupt’s estate. [note 1]
If a bankrupt is in receipt of a state pension, payments can be included in any calculation for an income payments agreement or income payments order. [note 2] 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 Chapter 31.7 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 comments on contracted-out schemes in paragraph 61.28 and the validity of any forfeiture clause (see paragraph 61.30)) form part of the bankrupt’s estate. [note 3]
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 (Jones v Patel [2001] BPIR 919) [note 4]. 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.
61.27 Dealing with occupational schemes
Where the official receiver is informed that a bankrupt has an occupational pension entitlement, he/she should make enquiries of the scheme administrators or trustees to establish whether all or part of the benefits will vest (in this he/she should of course have regard to the effectiveness of any forfeiture clauses). Where the scheme is known to have a valid forfeiture clause (see paragraph 61.30), the official receiver should only send letters of enquiry to the scheme where the bankrupt is believed to be in receipt of a pension or will reach pensionable age during the period he/she is an undischarged bankrupt.
The official receiver should inform the bankrupt whether or not the benefits under the pension scheme are being claimed in the bankruptcy. If the official receiver then makes a claim to the benefits which is resisted by the scheme trustees, he/she should seek legal advice on the merits of the claim. Where there are no funds in the estate to pay for such advice, the official receiver should invite the major creditors to provide funds or indemnities to meet the cost of the advice. If the creditors decline to provide funds, the official receiver should take no further action in relation to the pension. If, however, the pension comes into payment and the bankrupt remains undischarged from the proceedings the official receiver should apply to the court for an income payments order to recover any lump sum and may include other pension payments in his/her calculation for income in his/her application (Kilvert v Flackett [1998] BPIR 721). [note 5]
61.28 Occupational pension schemes - Contracted-out schemes
Most public sector occupational pension schemes and some private sector schemes contracted - out of the State Second Pension scheme (S2P) (formerly SERPS). In return, both the employer and the employee pay a reduced rate of national insurance contributions. Members of a scheme which has opted out will no longer receive a S2P (although the member will still receive the basic old age pension) but instead the employer will guarantee an amount of pension benefits which will compensate for the loss of the S2P.[note 6]
The significance of this, in the event of a contracted-out scheme member’s bankruptcy, is that a portion of the scheme member’s pension benefits, which represent an equivalent of the S2P benefits, are treated as if they were state benefits and do not vest in the trustee in bankruptcy.
Prior to April 1997, for some schemes (final salary schemes, and a few money purchase schemes) these rights were described as a guaranteed minimum pension. Since 1997, contracted-out schemes have had to meet a new test known as the reference scheme test. This test ensures that in order to opt-out, a scheme must offer members benefits which are at least as good as the test standard [note 7]. For most money purchase schemes these benefits are always described as protected rights.
Protected rights are invested to build up a fund used to provide members with a retirement pension in place of the pension they would otherwise have built up in the S2P if the scheme had not contracted-out.
61.29 Occupational pension schemes - Forfeiture clauses - definition
A forfeiture clause is a clause in the rules of an occupational pension scheme which may forfeit all the member’s rights to receive benefits from the pension scheme upon certain events occurring (e.g. an attempt by the member to assign his/her benefits). The trustees of the scheme then have discretion to pay the forfeited rights as they choose for the benefit of the member or his/her dependants. The precise effect of the clause, and the operation of any discretion given to the trustee of the scheme, will be defined by the wording of an individual clause.
61.30 Validity of forfeiture clause against the trustee in bankruptcy
Forfeiture clauses which seek to alienate rights to which the individual is absolutely entitled and/or which seek to place an individual’s assets beyond the reach of his/her creditors are in principle invalid against a trustee in bankruptcy. In occupational pension schemes such clauses have statutory authority, either by virtue of the Act of Parliament under which the public sector scheme was founded or by virtue of section 92 PA95.
A properly worded clause in an occupational pension scheme should not be challenged by the trustee in bankruptcy and none of the pension benefits will vest providing the clause was in the scheme rules at the date of the bankruptcy order (see also paragraphs 61.29 to 61.34).
If the bankrupt is undischarged and the pension comes into payment, the official receiver may apply to thecourt for an income payments order to recover any lump sum and can include other pension payments in calculating income for the application [note 8] (Kilvert v Flackett [1998] BPIR 721).
61.31 Challenging forfeiture clauses in occupational schemes
A forfeiture clause in an occupational pension scheme which provides that any pension rights and benefits are not payable (or are forfeit) upon the making of a bankruptcy order against the member should not be challenged by the official receiver. Similarly, if the wording of the clause is less direct but could be said to refer to the trustee in bankruptcy, e.g.
‘if the member does or suffers any act or thing whereby (whether by operation of law or otherwise) the said benefits if belonging to the recipient absolutely would be or become wholly or in part payable to another person’,
the official receiver should not seek to challenge the clause.
61.32 Armed Forces Pension Scheme
The Armed Forces Pension Scheme (which administers pensions schemes for the Army, Royal Air Force and the Royal Navy) does not have a clause which prevents the trustee in bankruptcy from claiming the member’s benefits. The exception to this is a pension awarded under the Naval, Military and Air Forces Etc (Disablement and Death) Services Pensions Order 1983 [SI1983/833, as amended] where a member of the armed forces was injured in the course of duty and awarded a disablement benefit. The official receiver should not claim these benefits.
The Ministry of Defence consider that the trustee is prevented from claiming a pension because of a general non-assignment clause unless an income payments order is obtained. The official receiver should maintain the position that the pension vests in the trustee without the need for a further order. Where benefits under the Armed Forces Pension Scheme are paid to an undischarged bankrupt, the official receiver should make application to the court for an income payments order if the bankrupt is a suitable candidate for such an order. The official receiver is likely to receive a standard reply from the Ministry of Defence and the letter in Annex 1 to this chapter should be amended as appropriate as a reply.
If the official receiver requires any further guidance he/she should contact Technical Section.
61.33 Principal Civil Service Pension Scheme
The Cabinet Office considers that there is doubt whether pensions under the PCSPSform part of the bankruptcy estate for those cases which pre-date the introduction of the WRPA99 because section 5 of the Superannuation Act 1972 states that any assignment of pension rights is void. The Cabinet Office also considers that as a pension is a chose in action, the rights and benefits are deemed to have been assigned to the trustee in bankruptcy under section 311(4) the Insolvency Act.
These arguments are not accepted by the Service. Technically assignment and vesting by operation of law under section 306 are different legal concepts. The official receiver should claim that the pension is property that has vested in the trustee in bankruptcy and is part of the bankruptcy estate. The pension rights and benefits vest under section 306 and not section 311(4). The latter provision is included in the Act to overcome any difficulty in interpreting section 306(2) but is not the means by which the rights and benefits pass to the trustee.
All HM Revenue and Customs approved pension schemes will contain a general clause which prevents benefits being assigned or charged. These clauses are required to gain approval from Revenue and Customs for the scheme and its members to benefit from the tax exemptions available for approved pension schemes. Where the bankruptcy petition was presented before 29 May 2000, general clauses of this nature are not effective against the trustee as any asset vests in a trustee without any conveyance, assignment or transfer. [note 9] The official receiver should not accept any refusal by the scheme trustees to either note his/her interest or pay funds to the bankruptcy estate by reference to such a general clause.
61.35 Recovery of pension payments
If the bankrupt has made large payments into an occupational pension scheme whilst insolvent, either from his/her wages or as additional voluntary contributions (AVCs), the trustee may be able to claim back excessive contributions. (see paragraph 61.12)
61.36 Special cases: Trivial commutation
If a bankrupt has a small enough pension fund, which can be in one fund or made up of contributions in several different funds, he/she can elect to take the whole lot as a cash lump sum. (The limit at 6 April 2006 was £15,000 but this is subject to change - see paragraph (d)) [note 10] Where a pension vests, the official receiver may choose to commute the pension benefits any time after the bankrupt's 60th birthday providing the following conditions are satisfied:
The official receiver should write to the pension scheme provider if he/she wishes to commute a small pension.
61.37 Bankrupt can not act as pension scheme trustee
A bankrupt, who is a member of an occupational pension scheme may, at the date of the bankruptcy order, hold office as a trustee of the pension scheme. The majority of occupational pension schemes are trust schemes and an undischarged bankrupt cannot act as a trustee of a trust scheme. If the bankrupt is holding office as a member nominated trustee he/she should be notified of this prohibition. [note 11]
61.38 Personal Pensions - definitions
(a) Personal pension plan
A personal pension plan is an investment policy designed to offer a lump sum and income on 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 earliest retirement age under a personal pension is 50 - but this depends on the pension scheme rules. (From 2010 this rises to 55)
(b) Retirement annuity contract
Prior to 30 June 1988, individuals not in pensionable employment or those self employed were able to qualify for tax relief for contributions made to a pension scheme known as a retirement annuity contract (RAC). Although RACs were replaced by personal pension plans from 1 July 1988, those already in force may continue to operate.
The earliest retirement age under a retirement annuity contract is generally 60 but from 6 April 2006, certain prescribed schemes (e.g. armed forces, firefighters and police) and certain prescribed occupations (e.g. footballers, dancers, members of the reserve forces) may be entitled to take benefits before their minimum retirement age. (This applies to benefits after 6 April 2006 but before the minimum pension age under the RAC) [note 12]
61.39 Dealing with personal pensions
With the exception of protected rights (for definition see part 8), personal pensions form part of the bankrupt's estate.
In re Landau (a bankrupt) [1997] BPIR 229 it was held that in the absence of any provisions for forfeiture, all of the bankrupt's rights under a personal pension policy vested in his trustee. Ferris J. was satisfied that Mr Landau's bundle of contractual rights under the policy constituted a chose in action which fell within the definition of property [note 13] notwithstanding that at the start of the bankruptcy, there was nothing immediately payable under the policy.
In Dennison v Krasner and Lesser v Lawrence [2000] BPIR 410, the appeal court judges commented that although Parliament had provided that certain pension schemes should be out of reach of creditors, it had not done so in relation to annuities and personal pension schemes until the passing of the WRPA99. The absence of any protection for schemes prior to WRPA99 was a deliberate choice which could not be avoided by restricting the construction of section 283(1).
In Malcolm v Mackenzie [2005] BPIR 176, Mr Malcolm appealed against a decision dismissing his application to restrain his pension provider from transferring the value of his pension at the request of his trustee in bankruptcy. Mr Malcolm's trustee sought to obtain the benefit of the retirement annuity contract from the insurer by the application of the transfer value towards a personal pension scheme. Mr Malcolm argued that protection for employees with an occupational pension scheme was greater than that given to the self-employed. He claimed that this was in contravention of The Human Rights Act 1998 as it was discriminatory on the basis of employee status. This was rejected by the Court of Appeal. It was suggested that the difference was that occupational pension schemes are established by way of trust and retirement annuity contracts are bilateral contracts, with no possibility or including, or enforcing forfeiture provisions. It could be argued however that the difference is because historically forfeiture clauses were not considered to be effective plus individuals would not normally want provision for their rights to be divested.
The distinction between the treatment of the rights of a member of an occupational scheme and a personal pension scheme was recognised in a Green paper (Cm.4179) presented to Parliament 2 years after the Landau case. The distinction was described as 'unfair'. This lead to the introduction, in the WRPA99, of section 11 which excludes the bankrupt's rights under an approved scheme from his/her estate.
The WRPA99 is not retrospective. Where the official receiver is dealing with a case where the bankruptcy petition was presented before 29 May 2000, he/she should claim the bankrupt's pension benefits. The official receiver is entitled to realise the maximum lump sum plus all payments (except the guaranteed minimum pension.)
Where the lump sum and annuity payments are sufficient for an Insolvency Practitioner to accept the case, the official receiver should make application for a Secretary of State appointment. In other cases the official receiver should realise the maximum lump sum benefit and seek to agree with the pension provider the payment of the annuity for the next 5 years only.
Pension providers may be happy to make 5 years of annuity payments at the same time as making the lump sum payment to save on administration costs and the official receiver should endeavor to negotiate such an arrangement where possible.
When the official receiver has received the agreed payments, he/she should inform the pension provider that he/she has no further interest in the pension policy.
61.40 Realising occupational and personal pensions
Where the pension vests, the Service's policy is to realise the maximum lump sum benefit and to agree with the pension provider the payment of the annuity (the regular payment which the former bankrupt would be paid) for the next 5 years only.
This will normally mean that, subject to the exception below, when the former bankrupt reaches age 50 (55 years from April 2010) the RTLU official receiver should send form RTLUPEN1 to the pension provider to realise the pension benefits. The official receiver should select the maximum lump sum option plus an annuity guaranteed for a period of 5 years. The fact that the annuity is guaranteed means that the annuity will continue to be paid even if the former bankrupt dies during the period of the annuity guarantee.
At the end of the guarantee period, the RTLU official receiver should inform the pension provider that he/she has no further interest in the pension benefits and advise them to make any further payments to the former bankrupt. A copy of that correspondence should be sent to the former bankrupt. The case can then be concluded with the funds distributed as appropriate.
In a small number of cases the pension fund will not be available until the former bankrupt reaches age 60. In such cases the RTLU official receiver should realise the maximum lump sum plus 5 years annuities at this point. It may be possible for the whole of the amount requested to be paid as a lump sum if the total fund value available is less than 1% of the standard lifetime allowance (see paragraph 61.36)
61.41 Dealing with pensions in cases handed back by Insolvency Practitioner Trustees
Where an insolvency practitioner trustee hands back a case with an unrealised pension to the official receiver, the RTLU 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.
[Back to Part 2 - Bankruptcy - Pensions and Divorce/Dissolved Civil Partnership] [On to Part 4 - Pensions Act 2004 - Provisions applicable where insolvency order made on or after 6 April 2005]