Is your pension protected if you go bankrupt?

In England and Wales a pension in a registered scheme is normally kept out of a bankruptcy estate, but income already being paid can be claimed.

If you are worried about debt, the short answer to whether your pension is protected from bankruptcy is usually yes for the pot itself, with some important limits. Those limits cover pension income that has started, and contributions a court finds excessive. This page sets out the England and Wales rules first, then Scotland and Northern Ireland in outline. It is general information, not legal advice, and for the debts themselves the free advice services listed near the end come first. Unsure how bankruptcy would touch your own pensions? Each scheme you hold can be discussed, free, with an FCA-authorised adviser; fill the form on this page and ask to be rung.

Is my pension protected if I am made bankrupt?

Rights in a pension scheme registered with HMRC are normally excluded from your bankruptcy estate, so a trustee in bankruptcy cannot simply sell or take the pot. The Welfare Reform and Pensions Act 1999, section 11, says: "Where a bankruptcy order is made against a person on a bankruptcy application made or petition presented after the coming into force of this section, any rights of his under an approved pension arrangement are excluded from his estate."

The Act defines an approved pension arrangement mainly as "a pension scheme registered under section 153 of the Finance Act 2004". That covers most workplace schemes and most personal pensions, including a SIPP that is registered, and the pots described on how the UK pension system works. Other arrangements are listed in the section, and an unregistered one may be treated differently.

GOV.UK puts it simply: once you have been made bankrupt, you can usually keep any money you have previously put into a UK pension. The protection has a practical side. When someone applies to become bankrupt, GOV.UK says an Insolvency Service adjudicator checks the application to see whether other money, for example a pension or savings, could pay the debts instead. So a pension is not invisible to the process, even where it is kept out of the estate.

Can creditors claim pension income I am already being paid?

Yes, in part. The estate rule protects the rights, not the payments once they start. Under section 310 of the Insolvency Act 1986 the court can make an income payments order, which claims part of your income for the estate for the period the order covers. For this purpose income includes "any payment under a pension scheme", and the section applies despite the protection in sections 11 and 12 of the 1999 Act.

Three limits apply. The order cannot leave you below what the court thinks is necessary for the reasonable domestic needs of you and your family. It can run for no more than three years from the date it is made. And payments of guaranteed minimum pension are excluded from it. Only the trustee can apply, and only before you are discharged. In practice, GOV.UK explains, the trustee first works out what you need for expenses such as rent, bills and food, and may ask you to agree monthly payments from spare income for up to 3 years, called an income payments agreement; the court order is the route if you do not agree.

That is why the way a pension is taken matters. Income from an annuity or from drawdown, once it is being paid, is the kind of money the order can reach; see how annuities work and how drawdown works for how those payments arise.

Can the court force me to draw my pension?

Not through an income payments order. The Court of Appeal decided this in Horton v Henry [2016] EWCA Civ 989. A trustee in bankruptcy asked for an income payments order against a man who was 59 when the application was made and had not drawn from his SIPP and other pensions, although he was old enough to do so. The trustee's argument was that a right to draw benefits at will should count as income.

The court disagreed. Lady Justice Gloster, giving the leading judgment, found no basis for treating a bankrupt's contractual right to draw down or crystallise a pension as "income of the bankrupt" under section 310(7). She added that reading section 310 as applying only to pensions in payment "sits far more easily with the statutory language", and the trustee's appeal was dismissed.

Two cautions. The case concerned a pension not yet in payment, so it does not help once income has started. And it is one court's reading of the law; a different set of facts could be argued differently. For the ordinary choices at and after minimum pension age, see when you can start taking your pension.

Can money paid into a pension be recovered?

Yes, where contributions were excessive. Section 342A of the Insolvency Act 1986 lets the trustee of your bankrupt estate apply to the court for an order. The court has to be satisfied that making the contributions "has unfairly prejudiced the individual’s creditors", and can then make an order to restore the position to what it would have been without them.

The section tells the court to consider in particular whether any contributions were made "for the purpose of putting assets beyond the reach of the individual’s creditors or any of them", and whether the total paid in was excessive given your circumstances when you made the payments. Regular saving that suits your circumstances is a different thing from a large lump sum paid in as debts mount. Money that went in for tax relief is covered on how pension tax relief works.

Paid in more than usual lately while debts built up? Ask through the enquiry form for a free phone call about the pension side, from an adviser with FCA authorisation. For the debts themselves, use the free services listed below first.

How do Scotland and Northern Ireland treat pensions in insolvency?

Scotland uses sequestration under the Bankruptcy (Scotland) Act 2016. Section 11 of the 1999 Act extends to Scotland as well, so approved pension rights are kept out of the estate there too, although section 90 of the 2016 Act lets a debtor contribution order be made irrespective of that protection. The Accountant in Bankruptcy's guidance says that where "the debtor is in receipt of any form of pension or annuity at the date of bankruptcy, such payments are classed as income which does not vest in the trustee". It adds that the trustee can still seek a contribution from that income through a Debtor Contribution Order, including a one-off contribution from a lump sum. The guidance also says unapproved personal pensions still vest in the trustee, though there are routes to ask for them to be excluded. Section 101 of the 2016 Act has its own power to recover excessive pension contributions.

Northern Ireland has parallel legislation. The Department for the Economy says a trustee cannot usually claim a pension as an asset if the bankruptcy petition was presented on or after 29 May 2000, provided the scheme was approved by the Inland Revenue (now HMRC). Article 12 of the Welfare Reform and Pensions (Northern Ireland) Order 1999 excludes rights under an approved pension arrangement from the estate. Article 283 of the Insolvency (Northern Ireland) Order 1989 allows income payments orders that reach pension payments, and Article 315A lets a trustee apply to the High Court about excessive contributions.

Can creditors take my pension if I am not bankrupt?

Bankruptcy is a formal process, and the protection above belongs to it. In Horton v Henry the Court of Appeal referred to the High Court decision in Blight v Brewster that, before bankruptcy, a creditor with a court judgment may by injunction make the debtor elect to draw down a pension, and repeated that judge's point: "prior to bankruptcy pensions are not protected, after bankruptcy they are". For occupational schemes, section 91 of the Pensions Act 1995 provides that "the entitlement or right cannot be assigned, commuted or surrendered", subject to listed exceptions that include an income payments order. Whether a creditor could use that route against your own pension depends on the debt and the scheme, so take it to a free debt adviser or a solicitor.

Other pension topics that often come up alongside debt include how pensions affect means-tested benefits and pensions on divorce. A defined benefit scheme that fails is a separate matter, covered on whether final salary pensions are protected.

Where can I get free debt help first?

Bankruptcy is only one of several ways of dealing with debts, and its effects last. The GOV.UK page Options for dealing with your debts sets out the alternatives, and two charities offer free, confidential advice: National Debtline and StepChange. Both are free to use, and in Northern Ireland nidirect lists StepChange and Advice NI for free advice. Ask one of them before you decide on a route, and before you move or cash in any pension money. Borrowing against a home to clear debts is a different decision again; equity release with bad credit covers the lender side.

For the retirement-income side, Pension Wise offers free government-backed guidance. When the debts are settled, an FCA-authorised adviser can talk about pensions and retirement plans together; the short form here requests a free call-back.

Short questions on bankruptcy and pensions

Is a SIPP protected from bankruptcy?

A SIPP that is a pension scheme registered under section 153 of the Finance Act 2004 falls within the section 11 definition, so its rights are normally excluded from the estate. The pension in Horton v Henry was a SIPP.

Will my pension stop me being made bankrupt?

Not automatically. When you apply, an adjudicator checks whether other money, for example your pension or savings, could pay the debts instead, and may refuse the application if that money covers them.

Is any pension income safe from an income payments order?

Guaranteed minimum pension payments are excluded from the definition of income in section 310. For everything else the court cannot leave you short of the reasonable domestic needs of you and your family, and an order lasts no more than three years.

Does Horton v Henry mean a trustee cannot make me draw benefits?

Correct for a pension not yet in payment: Horton v Henry held that a bankrupt's right to draw down a pension is not income for an income payments order. Whether other powers could apply in a particular case is something a debt adviser or insolvency practitioner can explain.

Do pension payments count differently in Scotland?

The Accountant in Bankruptcy treats payments you are already receiving at the date of bankruptcy as income that stays with you, though the trustee can seek a contribution from it through a Debtor Contribution Order.

Where are the rules set out in full?

The main provisions are on legislation.gov.uk: Welfare Reform and Pensions Act 1999, section 11, Insolvency Act 1986, section 310 and section 342A. The Horton v Henry judgment is on Find Case Law. Hub explainer: workplace pension rules.