Can they take your pension?

There is a general assumption that, while other assets may be accessed by creditors, a pension is safe. This assumption is unsound.

Pension is an item of property

A pension is an asset of a member like any other asset. The law treats it as a present right to a future payment.  Like any other rights they are capable of being charged as security or assigned to any third party unless there are specific rules to the contrary governing them. In this regard there is a huge difference between an occupational pension and a personal pension.

Occupational Pension

An occupational pension is a pension established by an employer for the benefit of the employees. The intention is to ensure that employees have a reasonable standard of living after their retirement. An employer would not normally intend that such a pension would be used as collateral for borrowing or be available to discharge liabilities of the employee. It is, accordingly, common for pension schemes to include a provision that the benefits will be forfeited in specified circumstances. These would include any attempt to assign the benefit of the pension or if the person entitled becomes bankrupt. In those circumstances the benefit of the pension falls back into the general pool and if the rules so permit the trustees can, at their discretion, pay the benefit to a person chosen from a class of beneficiaries specified in the pension documentation. This would normally include the member, the member’s spouse and/or dependents of the member. The benefit under the pension, accordingly, never forms part of the assets of the insolvent pensioner, and accordingly cannot be accessed by that person’s creditors. This only arises if the rules so provide and the trustees exercise their discretion in that fashion.

Personal Pensions

A personal pension is in a totally different category to an occupational pension. A personal pension is typically a matter of contract between the client and the pension provider and the employee is not involved, save that for any contributions the employer may make to such a pension. Typically there are no forfeiture clauses protecting the pension benefits. Indeed in the context of an arrangement based on contract, there would be grave doubt as to the efficacy of such provisions. Accordingly entitlements under such arrangements are open to attack by creditors. Where the entitlement is only going to fall due some considerable time in the future, there may be a hope that the storm will have passed in the interim. However in the context of bankruptcy, that hope is in vain. The case of re L Bankrupt is an example of a situation where no forfeiture clause was available. A solicitor took out a retirement annuity contract in 1982. In 1990 a bankruptcy order was made against him. He was discharged from the bankruptcy in 1993. A year later he retired and sought to obtain the benefits payable under the policy. The trustee in bankruptcy however claimed the benefits under the pension. The court held that, on the commencement of the bankruptcy, the solicitor had a present right to compel the pension provider to make payments under the policy in the future and that formed part of the property of the bankrupt which, in turn, was vested in the trustee in bankruptcy upon the making of the bankruptcy order.

ARFS

Even in the case of an occupational pension once the assets under the pension are vested in the pensioner or in an ARF, the protection of a forfeiture clause no longer applies.

Revenue Commissioners

The Revenue have significant powers of attachment under Section 1002 Tax Consolidation Act 1997. Under this section, the Revenue can require that where a debt is due to a taxpayer, the amount of tax outstanding is deducted from that debt and paid to the Revenue instead. However, the provision expressly excludes any amount due to the taxpayer as emoluments under a contract of service. Accordingly, a pension payable by an employer is not subject to attachment. However, this exception certainly does not apply to personal pensions and it is arguable that it does not apply to pensions payable by a third party pension provider even though contributions to that pension were made under a contract of service.

Reform required

National policy encourages the provision of adequate pensions on retirement. Protective measures such as forfeiture clauses were developed and supported by the law in an era where the bulk of pensions were provided by employers in the form of occupational pensions. There is an increasing move away from such occupational pensions to PRSAs and to other forms of personal pensions. It would be contrary to public policy if all entitlements under such arrangements were to be vulnerable to the claims of creditors.  The inequity in the treatment of two types of pensions has been recognised in the UK. Since 1999, any rights of a bankrupt pensioner under an approved pension arrangement are excluded from his estate in bankruptcy. In this regard in the UK personal pensions and occupational pensions are treated in the same way.  However, there may be concerns here that any reform should not be as simple as extending similar protections to personal pensions as apply to occupational pensions. Personal pensions have may be used as a means of making substantial savings and it would be invidious if the cloak of a pension scheme could be used to facilitate the avoidance of proper claims of creditors. The restrictions on the amounts deductible for tax purposes may ease concerns in this regard.

For more information please contact Paul Keane at  pkeane@reddycharlton.ie or 01 6619 500

Disclaimer

This information is for guidance purposes only. It does not constitute legal or professional advice. Professional or legal advice should be obtained before taking or refraining from any action as a result of the contents of this publication. No liability is accepted by Reddy Charlton for any action taken in reliance on the information contained herein. Any and all information is subject to change.