What happens to my Pension if I start a Trust Deed?

One of the fundamental rules of insolvency is that any money you have already paid into a pension fund is not available for your creditors.

This means that if you start a Trust Deed (TD) a pension fund that you have already built up will not be taken into account when considering your assets.

However if you are still paying into your pension or you are already receiving payments from a pension then it is important to understand how these things will be treated. We explain.

What if you are paying into your pension when you start a Trust Deed?

If you are employed and paying into a pension scheme run by your employer and you start a Trust Deed you will usually be allowed to continue to pay into this based on the scheme’s minimum allowable contributions.

If you are paying more than the minimum allowable contributions you may have to reduce the amount you are paying so that you do not pay more than the minimum amount. However whether this is required or not will depend on your circumstances and age.

BMD Tip: If you are paying into a personal pension the rules are slightly different. You may actually have to suspend payments until your Trust Deed is finished. However this will again depend on your age and other circumstances.

What if you are already drawing pension payments when you Trust Deed starts?

If you are already receiving a pension payment each month then this money must be included as part of your income if you want to start a Trust Deed.

All sources of monthly income including pension payments are included when calculating the amount of money you receive each month.

If you are not receiving pension payments when the agreement starts but you begin receiving them during it then this increase in income must be made known to your Trustee. They will then decide whether or not the payments you are making should increase as a result. This will depend on whether any other sources of income and or your living expenses have also changed.

BMD Tip: Generally speaking if during your TD you reach an age where you have the choice of whether to start taking pension income or not, then you cannot be forced to take this income if you do not need it. You could therefore chose to defer the payments until your Trust Deed is completed thus protecting your pension.

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Can you settle your Trust Deed early with a pension lump sum

If while your Trust Deed is running you reach an age where you can start drawing your pension you may also have the option of taken a lump sum from your pension fund.

It might be possible to use such a lump sum to offer a full and final settlement of the Arrangement. In other words you take the lump sum from your pension and pay it into the plan which settles the agreement meaning you do not need to make any further monthly payments.

Your TD could be settled in this way even though you might still be able to afford to make monthly payments until its natural end.

The reason for this is that you are not obliged to take the lump sum from your pension. As such your creditors would not have the opportunity of having the lump sum payment anyway. It is therefore legitimate to ask them to accept the lump sum that they would otherwise not be entitled to in exchange for forgoing further monthly payments.

If you are not already in a Trust Deed but are in a position to be able to draw a lump sum from your pension, you could offer a full and final settlement TD without any additional monthly payment agreement.

Again, the fact that you are not obliged to draw down a lump sum from your pension means that your creditors are being offered something that they would not otherwise be entitled to if you decided to start a simple monthly payment TD.

Pensioners should not rule themselves out of a Trust Deed

The key thing about starting a Trust Deed is that any pension fund that you have already built up cannot be touched.

With this in mind, if you are already drawing a pension and are struggling with debts, the pension payments you are receiving are simply treated as income in the same way as any other monthly income.

If you are nearing pensionable age and have the opportunity to draw a lump sum from your pension, this could be used to settle your debts in full.

However if you are in an Trust Deed or thinking about one, you should not agree to take a lump sum payment from your pension before discussing this with a debt expert and understanding your options. Otherwise you might risk the sum being treated as a windfall and having to pay it to your creditors together with and ongoing monthly payments missing the opportunity to offer is as a lump sum settlement of your debts.

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