Pensions and a trust deed

Most personal and workplace pension plans are not handed over to your trustee in a protected trust deed, so the savings built up inside them are usually left alone. A pension you are already being paid is treated differently: it counts as income, and it can affect your monthly contribution. If you are thinking about taking a lump sum or starting to draw a pension while a trust deed runs, speak to your trustee first.

Does a trust deed include my pension pot?

When you sign a trust deed, you pass your estate (the things you own) to a trustee. The trustee is a licensed insolvency practitioner who runs the trust deed and pays your creditors. The law leaves out anything that would not pass to a trustee in a bankruptcy, which in Scotland is called sequestration.

The Accountant in Bankruptcy (AiB), the Scottish Government agency that supervises trust deeds, publishes guidance for trustees. It says that most personal and occupational pension plans are not conveyed (passed over) to the trustee. In practice:

• a workplace (occupational) pension is usually left out
• a personal pension you pay into yourself is usually left out
• the trustee does not usually cash in or sell your pension to pay creditors

The word “most” matters. AiB’s bankruptcy guidance explains that unapproved pension schemes are treated differently and can pass to a trustee, although there are ways to keep one out, for example where it is your only or main pension. These schemes are uncommon. If you are not sure what type of pension you have, your pension provider can tell you.

You still have to tell the insolvency practitioner about every pension you hold, including old workplace pensions. AiB says you must give information about all your assets, even ones the trustee does not plan to touch.

What if my pension is already being paid?

A pension that is already paying out is treated as income, not as an asset. AiB’s guidance follows a 2019 Sheriff Court decision on this point.

Your monthly contribution is worked out using the Common Financial Tool. This is the budgeting method used across Scotland’s statutory debt solutions to decide what someone can reasonably afford after essential living costs. AiB’s list of income a contribution can come from includes private pensions and annuities.

State pensions are different. The Bankruptcy (Scotland) Act 2016 says a trust deed contribution must not include any amount that comes from a social security benefit. AiB’s list of payments no contribution can be taken from includes state retirement pensions and Pension Credit. Your trustee can take them into account when looking at your whole budget, but the contribution itself has to come from your other income.

For example, if your income is a State Pension plus a small workplace pension, any contribution can only come from the workplace pension, never from the State Pension.

What happens if I take a lump sum or start drawing a pension?

This is where you need to be careful. AiB’s trust deed guidance points trustees to its bankruptcy guidance on pensions. That guidance says:

• if a pension starts being paid during the bankruptcy, all the pension benefits, including any lump sum, are taken into account when working out contributions
• a trustee can ask for a one-off contribution from a lump sum the person receives

So if you reach the age where you could take money from your pension, or someone suggests you do, speak to your trustee before you act. AiB’s key facts document for trust deeds says you must tell your trustee straight away if your financial situation changes, and that your payments are reviewed at least once a year.

If you are over 50 and have a pension pot, the Pension Wise service offers a free appointment about your options for taking money from it. GOV.UK says Pension Wise does not cover the State Pension, “final salary” or “career average” pensions. Whatever you are thinking of doing, tell your trustee before you act.

Can I keep paying into my pension?

Your pension payments are part of the budget your trustee looks at, and AiB’s Common Financial Tool guidance sets out how they are treated:

• payments you do not have to make, such as extra private pension contributions on top of your usual ones, should be questioned
• pension contributions that went up recently and could be seen as excessive should also be questioned, and if they are excessive you may be asked to pay a higher contribution into your trust deed
• advice about whether to increase or reduce pension contributions is regulated pension advice, which a trustee or money adviser cannot give, so you would be referred to an appropriate adviser

If you are about to start a trust deed, tell the insolvency practitioner about any recent changes to your pension payments. If you are thinking of changing them during the trust deed, talk to your trustee first. You can read more about how the monthly figure is set in how your trust deed payment is worked out.

Is a trust deed the only option if I have a pension?

No. A trust deed is one of several ways to deal with debt in Scotland, and an adviser needs to look at your full situation, including your pension, before anyone can say what might suit you. The main alternatives are:

• The Debt Arrangement Scheme (DAS). You repay your debts in full through a debt payment programme, and interest, fees and charges are frozen. You do not have to use your savings or sell your home or car. Read about the Debt Arrangement Scheme.
• Sequestration (bankruptcy). The pension rules described on this page come from AiB’s bankruptcy guidance, so pensions are treated in a similar way. Read about sequestration in Scotland.
• The Minimal Asset Process (MAP). A simpler form of bankruptcy for people with low income, few assets and debts of no more than £25,000. There is no fee.
• An informal debt management plan. Not legally binding, and creditors do not have to stop interest.

You can talk all of this through with a free, impartial service first. See free debt advice in Scotland. If something changes during a trust deed, such as an inheritance, read windfalls and inheritance in a trust deed.

Official sources

• AiB Notes for Guidance, protected trust deeds: section 2.10, Assets
• AiB Notes for Guidance, bankruptcy: section 7.7, Pensions
• AiB Notes for Guidance, Common Financial Tool: section 3, Income, and Appendix A
• Bankruptcy (Scotland) Act 2016, section 181 (contributions and social security benefits)
• GOV.UK: Personal pensions, get help (Pension Wise)