Older individuals and sole traders may have to pay out of their own pension pot if they are in debt to creditors. A court case could rule there is an alternative for creditors and the Insolvency Service to retrieve monies owed through pensions, something which hasn't been possible in the past. Only the 25% tax free lump sum from a pension could be considered by the official receivers in an individuals’ case.
The Government brought in changes to pension freedoms in April, resulting in calls to adapt debt collection surrounding bankruptcy and pensions. With over 55s now able to access their entire pension in a lump sum, some have felt those in debt should use part of this amount to pay back creditors.
The High Court recently ruled a bankrupt could not be forced to use their pension to pay back creditors (Horton v Henry, December), however the case is now in the stages of appeal and in light of the new pension freedom rules, many are concerned what the outcome might be.
Debt charity groups want to ensure pensions stay protected by the government and for the issue not to be decided through the courts as it may contradict public policy.
The Insolvency Service currently states official receivers should only consider pension pots if the individual has made unusually large contributions prior to declaring bankruptcy, in an attempt to protect assets and avoid paying out.
If older entrepreneurs and sole traders were forced to use their pension, it could prove very difficult to escape debt. Individuals should seek legal advice if they are concerned about their current situation, however as of it, it is unclear whether the court case will be successfully appealed.