Bankruptcy is a stressful event for the bankrupt, particularly when the trustee in bankruptcy decides to seek a contribution to the creditors from pension policies that have not yet vested, as happened in a recent case.

The trustee in bankruptcy claimed that the man should be required to take his pension policy, so that the proceeds could be retained by the trustee for the benefit of the man’s creditors. One of the policies was able to be drawn down, with a tax-free lump sum of nearly £250,000 available.

However, the judge considered that the point of the legislation (Section 310 of the Insolvency Act 1986) that makes uncrystallised pension funds available to trustees in bankruptcy is to secure for the creditors sums that are in excess of the reasonable needs of the bankrupt and his family. Where a scheme has vested, this is relatively easy to calculate. However, when a scheme has not yet vested, this may be quite difficult to decide.

The case turned on when a pension holder ‘becomes entitled’ to the pension. ‘Entitled’ suggests a legal right to the payment of a defined sum under a contract. In the case of the pension policies which were the subject of the dispute, the sums were not precisely known and the bankrupt did not become entitled to them before he had made various decisions about how they were to be paid, guaranteed payment periods and so on. The legislation does not contain any language allowing the trustee to require the bankrupt to make any specific decisions regarding such pensions.

The uncrystallised pension funds were not therefore available to the trustee in bankruptcy.

It remains to be seen whether the new pension flexibility being introduced later this year alters the position.


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