Debt and Bankruptcy and Your Pension
Debt
Before you decide to begin saving for a pension, it is advisable to ensure that your personal finances are in good condition. If you have debts to clear, it will usually prove worthwhile to focus on doing so before attempting to save money for retirement. Once your debts have been cleared you can reassess your financial situation and decide how much you can afford to save in a private pension scheme. Naturally the type of pension scheme you wish to join and the type of debt you have will affect your decision. If you become a member of an occupational defined benefit scheme (see Defined Benefit Schemes) you may not be required to make any contributions to the scheme, or make only small contributions which are automatically deducted from your salary. If you have a mortgage on which you are making regular repayments you will usually not be able to repay this debt before you need to begin saving for retirement. However, be aware that committing to a savings plan will prove easier if your personal finances are in order and you have sufficient income to cover your outgoings without a struggle.
If you are paying into a private pension scheme (see Non-State Pensions) and find yourself struggling to make the payments because you are in debt, consider visiting your local Citizens Advice Bureau for help. You may be able to take out a loan which would consolidate your current debts, leaving you with only one monthly payment to make to your creditors, allowing you to continue making pension scheme payments. Alternatively, you may be able to negotiate smaller debt repayments with your creditors, either alone or with the assistance of the Citizens Advice Bureau, so that you are able to continue repaying your debts with less pressure and may even have enough financial margin to enable you to continue paying pension payments. If you feel that your current financial situation prevents you from being able to continue making pension scheme payments, discuss your difficulties with your pension scheme advisor. You may be able to stop making payments for a time, until you feel financially able. If your scheme does not allow you to stop making payments, your advisor may be able to assist you in finding a compromise, for example lower contributions, or inform you of the charges you will face if you fail to make payments.
Bankruptcy
If you have an overwhelming amount of debt and after taking advice you feel sure you will never be able to repay the money you owe, you may wish to consider filing for bankruptcy. Bankruptcy is where your debts are all cleared, enabling you to start again with a clean financial state. In exchange for this new start, you will face several bankruptcy penalties. You will usually be prevented from taking out money on credit, you will be restricted from working in some positions and professions such as accountancy, and you will be forced to give up control over your assets. When you file for bankruptcy, your assets will all be controlled by a 'trustee'. You may be required to sell your home, although you will be given time to find alternative accommodation and be allowed to keep any inexpensive items necessary for your occupation or household.
If you have filed bankruptcy for the first time, you may be discharged from bankruptcy after a relatively short period of time; if you are a repeat offender, you will have to appeal to the courts for your bankruptcy to be discharged. Bankruptcy is not a process which should be considered unless every other avenue has been explored. Although you are entitled to start afresh after bankruptcy, your credit score will be affected for several years and you may find it very difficult to apply for any kind of credit, such as a credit card or a mortgage.
If you file for bankruptcy, your entitlement to the State Pension (see The Basic State Pension) and state second pension (see State Second Pension) will not be affected. If your pension scheme is approved by Her Majesty's Revenue and Customs, your pension rights will usually be protected against bankruptcy. If your private pension scheme has not been approved, it may be seized and used to help pay off the debts you have accumulated. It might be possible for you to negotiate with your trustee and retain some or all of your pension rights. A friend or relative may be required to pay some money to prevent your pension rights being lost. The options open to you will depend on your individual situation and the ruling of your trustee. If you are already receiving a pension, your pension rights will usually be protected but you may be required to give some or all of the pension payments you are receiving to your trustee to go towards repaying your debts. For more information, contact the Pensions Advisory Service on 0845 601 2923, ask your pension scheme provider for their terms and conditions regarding bankrupt scheme members, or ask an independent financial advisor or an advisor at your local Citizens Advice Bureau for further assistance.
