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How Pensions are Affected by Bankruptcy and Insolvency

11 October 2016 - Posted by ebaxter

Financial problems can hit companies and individuals alike. This guide will lay out what it means for your pension if the company you work for becomes insolvent. There is also information on how your own bankruptcy can affect your pension.

How will my employer’s insolvency affect my pension

Defined Contribution Pension schemes are independent from your employer, so any money accrued in a fund is separate from the money held by the company itself; hence, your pension should be unaffected.

If you are made redundant once your company has gone into administration and you are owed contributions from your employer, you become just another creditor. The priority of your claim depends on how long after the company went into administration you were made redundant.

However, it is rare that a company will have withheld pension contributions. Unpaid pension contributions can be addressed through the Redundancy Payments Service.

Defined Benefits Pensions offer guaranteed pay outs at the end of your working life. The schemes take contributions and invest them in the stock market, with any liability taken on by the company. Consequently, it is unlikely that your employer will be able make the payments in the event of the company going into liquidation. Fortunately, the Pensions Protection Fund (PPF) was set up to account for just this scenario. The PPF will cover most of the pension you are owed, though there may be a small reduction if you have not already started receiving your payments.

How my own insolvency may affect my pension

It may be the case that you have personally entered into insolvency, such as bankruptcy, due to rising debts. If this has happened, anything you receive in the form of a pension may be taken into account when your assets are calculated in order to work out the correct level of payments to your creditors.

Individual Voluntary Arrangements:

State Pension payments count towards your overall assets. These will be taken into account when working out the amount you have to regularly pay towards your creditors. Defined Contribution Pension and Defined Benefit Pension payments will also form part of the calculations for the money you pay into your IVA. This especially includes lump sum payments. It is important to check with your independent financial adviser before deciding to take out a lump sum payment while under an IVA, as you may be required to hand it over as part of the arrangement.

If your company pension scheme has a forfeiture clause attached and you have yet to receive payments, your pension rights will be passed on to the pension scheme. This means that an IVA has no impact on the pension scheme itself, but you will lose the right to receive any payments from the scheme. However, under the discretion of the scheme’s administrator, the benefits could be passed on to your beneficiaries, and in some instances, you.

Creditors may also request that you halt any payments into a pension scheme. As an IVA is ‘individual’, it may be possible to come to an arrangement with your insolvency practitioner that avoids such a requirement.

Bankruptcy:

State pensions are protected in the event of bankruptcy. You will not be forced to hand your pension over to creditors, though it may be taken into account when the trustee in bankruptcy calculates your income.

Both Defined Contribution Pensions and Defined Benefit Pensions are protected by forfeiture clauses. However, if there is no clause in place and you are already receiving your payments, you may be required to use some or all of these payments to pay off creditors. It is vital to talk to your financial advisor about the implications that bankruptcy may have on your pension and other forms of income.

Terms relating to insolvency

Here are explanations to some basic terms surrounding bankruptcy and insolvency (this relates to England and Wales, terms and definitions may differ if you live in Scotland or Northern Ireland):

Term Meaning Relates to

Insolvency

A general term that refers to a situation in which a business or individual is unable to pay their debts. In law, there are two definitions for insolvency:

  • when the debts of a business or person are greater than the sum total of their assets.
  • when debts cannot be paid at the time they are due.

Both individuals and companies

Bankruptcy

This relates to a person’s inability to pay their debts. Bankruptcy proceedings can be bought about by a creditor — if they are owed more than £5,000 — or by the debtor themselves.

Individuals

Liquidation

This occurs as a result of a company’s insolvency. As part of the insolvency proceedings, the company’s assets are sold off to pay any debts that are due. It can be a compulsory order or done on a voluntary basis.

Companies

Insolvency practitioners

These are licensed professionals who assess and oversee the financial matters of insolvent companies or individuals.

Both individuals and companies

Trustee in Bankruptcy

A term used for the insolvency practitioner appointed to manage the administrative and financial affairs of a bankrupt, with a view to paying back creditors through the sale of assets.

Individuals

 

Ways of avoiding bankruptcy or liquidation

Before businesses face liquidation or individuals become bankrupt, they may attempt to rectify the situation through a number of measures. These could include:

Term Meaning Relates to

Administration

Entering into administration can help an insolvent company get back on track. When a company goes into administration, control is passed to a licensed administrator (insolvency practitioner) who will attempt to pay the company’s creditors. This will either be through the sale of certain assets or by proposing an agreement with creditors that allows the company to continue operating following a restructuring process.

Companies

Receivership

This occurs when a company has failed to repay its debts and a creditor decides to place a receiver in charge of the company’s assets in order to recover said debts. This is less forgiving than administration, which usually attempts to keep the company operational. Receivers, on the other hand, will be looking to sell assets in order for creditors to recoup as much of their losses as possible. 

Companies

Company Voluntary Arrangements (CVAs)

These are agreed between companies and their creditors. They provide a way of avoiding the liquidation of a company and prevent creditors from aggressively recovering debts. Under such arrangements, a certain level of debt repayment is agreed on by a majority (75%) of creditors in a bid to allow a firm to continue operating.

Companies

Debt Relief Orders

These are primarily for individuals who have few assets and low levels of debt.

Individuals

Individual Voluntary Arrangements (IVAs)

These follow similar rules to CVAs but relate to individuals attempting to avoid a declaration of bankruptcy. Unlike debt relief orders, IVAs are for people who owe large amounts to creditors and who can cope financially with larger debt repayments.

Individuals

 

   

 

If your circumstances have left you worried about the impact of insolvency on your pension then speak to the financial advisers at Campbell Harrison on 0114 272 3994.

Further Resources

Find out about auto enrolment into company pension schemes with our Comprehensive Guide to Auto Enrolment.

Read our FAQs on company pensions to find out more.

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