How Do Trust Deeds Affect My Pension?

Trust Deeds: How My Pension Affected?

Whether you are already a pensioner, you’re paying into a pension, or you’re about to receive a lump sum, if you’re thinking of applying for a protected trust deed or bankruptcy, there are a few things you’ll want to know…

According to UK government figures, and as reported by Age UK earlier this year, almost a million pensioners are just one unexpected bill away from financial disaster. Neither the Scottish Accountant in Bankruptcy nor the UK Government report insolvency statistics by age, but you don’t have to look too hard to find numerous articles reporting that bankruptcies are on the rise amongst young people, the ‘squeezed middle’ and over 55s. In short, insolvency can happen to anyone.

And that means the status of your pension in relation to your sequestration (bankruptcy in Scotland) or protected trust deed is an issue too, whatever your age.

Is my pension treated differently depending on whether I apply for sequestration or a trust deed?

There are a number of differences between protected trust deeds and sequestration, but generally speaking your pension isn’t one of them. The answers below apply equally, whichever insolvency route you’re considering. We talk about trust deeds below, but the information below applies equally to sequestration.

I’m thinking of applying for a Scottish trust deed, what happens to my pension?

The answer differs slightly depending on whether you’re past, approaching or some years away from pensionable age:

I’m already drawing from my pension

When your trust deed is set up, the trustee looks at your income, deducts certain allowable expenses and uses the rest to pay your creditors. If you’re receiving regular money from your pension, the trustee will include this as part of your income.

• Is my pension pot safe?

Yes. Although the trustee can use the income you receive from your pension as part of your income calculations, they can’t touch the pension pot.

• I’m about to receive a lump sum

Some pensions automatically pay a lump sum amount. Some give you the choice of taking a lump sum, switching the lump sum for an increased monthly income, or deferring your pension until a later age.

In general, the convention that the trustee cannot touch your pension pot remains, but where the lump sum is paid automatically, that then becomes a part of your income and could be used by the trustee to pay down debt.

So if, for example, your pension offers a choice of lump sum now or an increased monthly payment, and you choose the latter despite having a protected trust deed, then you can.

The situation may be different, however, if you deliberately make changes to your pension to avoid receiving a lump sum (i.e. your pension didn’t offer an alternative to receiving the lump sum and you switch to a product that does). That could be seen as deliberately divesting yourself of assets and the trustee may take action to recover the money.

If you are due to receive a lump sum talk to your financial adviser about your options.

• What if I start to receive a regular pension during the life of my trust deed?

When your trust deed is set up, your repayments will have been calculated based on your income and outgoings at the time. If things change because you start receiving a pension (or any other new income) you must declare these payments to your trustee. They could decide to include these payments as income and increase your contributions to creditors as a result.

I’m paying into a workplace/employee pension

• Can I keep making payments to my pension?

Generally yes, but usually only at the minimum contribution rate. If you are paying at a higher rate, therefore, the trustee may ask you to reduce payments for the lifetime of your trust deed.

It’s important to note that this applies only to workplace pension schemes – there are different rules for personal pensions (see below).

• Will my pension pot be used to pay creditors?

No. Your pension fund remains safe.

I’m paying into a private pension

• Can I keep making payments to my pension?

Possibly. This is for discussion with the trustee and their decision may rest upon your age, how close you are to retirement (and the potential effect on your pension fund) and the amounts involved.

In general, you would be expected to suspend payments to your pension fund.

• Will my pension pot be used to pay creditors?

No, the money you’ve already saved in your pension fund is safe.

I’ve put money aside for retirement, but it’s not in a formal pension scheme. Is my money still protected?

No. There are specific rules regarding pension funds (personal or private) that mean accessing your money before 55 is either impossible or comes with heavy financial penalties attached – because the money is designed purely as a retirement fund.

That’s not the same if you have simply saved money in an account or built up stocks and shares with the intention of using the saved sum to fund your retirement. That may be your intention, but the money could be used at any time. In this case, the trustee could expect you to use your savings to fund your debt.

Can I use my pension to settle my trust deed early?

Yes, at least in theory, although there are other considerations that may make this unwise.

If you’re ready to explore the options that could help you escape debt once and for all, talk to us.