Borrowers struggling with debts with money in a pension may have to hand over part of their retirement savings to repay what they owe, following a controversial court ruling.
Just how this new power for courts and creditors will affect pensions remains to be seen, but the worry for many who saved hard over their working life is that money set aside for their later years is not safeguarded as much as they believed.
Looking at the judge’s decision, it’s clear his thinking was that it’s unfair someone should try to stash cash in a pension while leaving their creditors with debts they could never repay and while other borrowers drawing income from their pensions don’t have the same protection for their assets outside a pension.
In effect, when Judge Bernard Livesey made his decision in the High Court, he was plugging a legal loophole.
In the case in question, bankrupt Michael Williamson had an untouched pension pot worth £1 million, although he could have accessed the money if he had wanted - significantly, this meant he could have drawn 25% of the fund or around £250,000 as a tax-free lump sum.
Livesey explained his thinking after the case, stating a bankruptcy order should not reduce a bankrupt's income below "reasonable domestic needs of the bankrupt and his family.
"The court will also have to evaluate what is fair and just between the competing interests of, in particular, the bankrupt and his creditors and make an order which is appropriate in all the circumstances of the case."
This means the judge feels every case of a bankruptcy involving someone with debts that could have been paid by tapping in to a pension fund needs to be considered carefully by a court balancing the financial interests of the bankrupt and his or her family against those of the creditors.
It’s clear, not everyone with a pension will be stripped of their retirement income, but at the same time, a pension fund has become an asset that needs evaluation not only in bankruptcy, but when considering other debt solutions, like an IVA (individual voluntary arrangement) as well.
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