Insolvency law allows banks to go after pensions
PEOPLE looking for debt deals under new personal-insolvency rules have been warned that banks may go after their pensions.
Finance experts said the pensions of most people were safe but warned that banks could stake a claim on a pension fund if excessive amounts of money had been put into it in order to keep it away from lenders.
The new insolvency regime will replace the current inflexible bankruptcy system with court-backed deals between strapped borrowers and banks, with some debt written off if a payment agreement is observed over a five-year period.
A late amendment to the legislation, which was passed over Christmas, will allow banks to tap into pension funds to pay down debts in some circumstances, said ITC Consulting pension expert Jeremy Mitchell.
He added that personal-insolvency practitioners, who act for indebted people by presenting a deal to the bank, will be able to examine pensions.
If the contributions that a person has made into their pension up to three years before insolvency are seen to be excessive, some of the fund could be used to pay down debt, Mr Mitchell said.
He explained: "The 'excessive contributions' rule is an anti-avoidance measure aimed at those who put significant sums – probably more than they had been doing – into their pension schemes in the three years before they go bankrupt.
"It also covers those who enter into one of the arrangements, where perhaps they were aware what was coming and were trying to squirrel money away that would otherwise be claimed by their creditors."
Mr Mitchell added that approved retirement funds (AFRs) were also vulnerable, as these were not protected under the Personal Insolvency Act.
However, he said that the majority of pensions were safe.
No claims can be made on the employer's contributions made to an occupational pension, even if benefits of between €50,000 and €100,000 are building up in the fund. It is only the contributions made by the debtor that can be targeted.
"So the self-employed and others who have made their own contributions to their pension schemes are more likely to be targeted in this manner," the pensions expert said.
Banks offering a heavily indebted person a deal on their borrowings are also entitled to go after pensions being paid out. This will also be the case of the person who is of pensionable age but has decided not to draw down their pension yet.