A recent Court of Appeal decision in the UK has ruled that individuals facing bankruptcy cannot be forced to hand over their pensions to pay off outstanding debts. We examine the affect insolvency can have on your pension in this jurisdiction.
The recent UK Court of Appeal decision in Horton v Henry ruled that there was no requirement to draw down funds held in a pension in the event of bankruptcy. As a result of this decision, the UK legal system now appears to acknowledge that pension funds should be out of the reach of a bankruptcy trustee.
Insolvency in Ireland
If you are unable to pay your debts and don’t think that you will be able to do so in the next few years, there are now four debt solutions which may help. The solutions available are:
Debt relief notices;
Debt settlement arrangements;
Personal insolvency arrangements; and
The option available depends on the amount owed, the type of debt, your income, and your assets. Each debt solution treats a pension differently.
Debt relief notices
You may apply for a debt relief notice (“DRN”) if you have: debts below €35,000, a low income, and few assets. Your DRN can include some secured debts, such as a car loan or mortgage, and unsecured debts, such as personal loans, credit card and business loans. A DRN will typically last for three years. After this, the money you owe will be cleared and the unsecured creditors named in your DRN cannot take any legal or debt collection action against you.
Any pension arrangements you have will be taken into account at your application stage. If you are deemed to be eligible and receive a DRN, the arrangement will have no further impact on your pension, unless your pension income increases during the supervision period.
Debt settlement arrangements and personal insolvency arrangements
A debt settlement arrangement (“DSA”) is only suitable for unsecured debts and will typically last up to five years. During this time, any unsecured creditors cannot take any legal or debt collection action against you. A DSA allows you to pay off as much of your unsecured debt as you can. Any outstanding balance after five years is written off.
A personal insolvency arrangement (“PIA”) can include both secured and unsecured debts. A PIA will normally last up to six years, but can be seven years in some cases. During this time the creditors named in your PIA cannot take any legal or debt collection action against you.
An on-going pension income, or an entitlement to a pension lump sum or income in accordance with the tax code, will be treated as applicable income for the purpose of a DSA and PIA. The terms of the DSA or PIA may provide for payment of some or all of a pension lump sum or income to creditors during the DSA/PIA period. Your pension fund will be excluded from any DSA/PIA arrangement if it is a "relevant pension arrangement" for the purposes of the 2012 Insolvency Act. An approved retirement fund (“ARF”) does not fall into this category and may be included in a DSA or PIA. Where the Personal Insolvency Practitioner or a creditor considers that you have made excessive pension contributions within three years prior to the application for a protective certificate, an application can be made to Court to recover these contributions for distribution to creditors.
Bankruptcy is a High Court process that deals with secured debt and unsecured debts. When you are made bankrupt, your assets transfer to a person in the Insolvency Service of Ireland (ISI) called the Official Assignee. Most forms of unsecured debt are written off and you may be able to agree a schedule of mortgage payments with the bank and the Official Assignee to enable you to remain in your home. Bankruptcy normally lasts for one year.
Generally, pension assets are not transferred to the Official Assignee. However, pension income receivable by you will be treated as income for the purposes of your bankruptcy. An ARF and Vested Personal Retirement Savings Accounts (Vested PRSAs) may be included in your bankruptcy estate for realisation and payment to your creditors. If you have a pension entitlement that matures within five years of your bankruptcy order, the Official Assignee will have the right to claim it for the benefit of the bankruptcy estate.
Current practice in Ireland is a little more complex than the recent UK decision of Horton v Henry, which decided that individuals facing bankruptcy will not be obliged to hand over their pension funds to pay off outstanding debts.
In Ireland, however, there is no protection for your pension assets if you possess an ARF or Vested PRSAs and this process is likely to become blurred in the future as the number and variety of pensions products increases.