Growing old disgracefully

The UK’s ageing population is set to cause no end of challenges over the next decades. The average 65-year-old man is expected to live 20 years and women another 26 after leaving employment. The impact will be felt everywhere. But even prosperous individuals are not preparing adequately for this extended period.

Some worrying trends have emerged in recent years. They point to a sharp increase in the number of older people falling into debt and bankruptcy at a time when, traditionally, they might have enjoyed financial stability. Between 2006 and 2012, BDO observed a 200 per cent increase in the number of bankrupts over 50. Over the past year, 43 per cent of BDO appointments as a trustee in bankruptcy have applied to individuals over 50, with 6 per cent applying to those over 65.

In most cases, bankruptcy orders relate to individuals with few or no assets. (BDO’s figures are skewed towards the more affluent end of the market.) However, the Insolvency Service reports that 44 per cent of all creditor-based bankruptcy orders made in 2011–12 involved a 50-plus bankrupt. Retired households made up 31 per cent of middle-income households in 2010–11, compared with only 9 per cent in 1977.

And a recent study by a leading consumer debt charity indicated that society had overlooked the growing problem of older people with large debts, with 7 per cent of those over 55 still holding secured debts exceeding £150,000. The picture is clear: more financial planning is required, more over-50s have bigger debts, more are getting into financial difficulty, and more affluent individuals are being pursued by creditors.

There are many reasons for this. The growing popularity of the ‘bank of mum and dad’ has resulted in a marked increase in the number of personal guarantees over debts such as children’s mortgages, with the consequence of a default potentially being borne by retirees. Personal guarantees over failed businesses are another causal factor, especially where the management of a family business has been passed down but the historic guarantees have remained in situ.

As a trustee in bankruptcy, it is commonplace to see cases in which retirees continue to spend at pre-retirement levels. It should set off alarm bells for advisers – if the retirement income is less than the previous earnings.

Easy target

‘Asset rich, cash poor’ older people are often obvious targets for creditors and debt purchasers. They seek stronger assurance that they have a realistic chance of recouping most of their debts and enough scope to fund the proceedings from the assets.

Since the financial crash, creditors are doing more research to establish whether a bankruptcy is ‘worth’ pursuing. Unsurprisingly, those with decent equity in their homes are increasingly in the cross hairs.

That same equity can, however, be used to help mitigate the impact for retirees in bankruptcy. Equity release can allow an older person to clear their debts while remaining in a home to which they may be emotionally attached. This can make it an effective tactic.

In other cases, where an individual is very old or in poor health, another approach may be to impose a charge over a property as an alternative to repossession, with the charge being paid out of the proceeds on the sale of the property after the individual dies.

Repossession of property where a debtor is very old or infirm is still rare, as the court is likely to deem it ‘exceptional circumstances’ with the debtor’s rights outweighing those of the creditor.

Pension allure

For advisers, another consideration is your client’s pension. But they are not the safe haven as often believed, despite the fact they are, in general terms, deemed to fall outside of the bankruptcy estate. Until recently, it was safely assumed that an individual’s undrawn pension fund was safe from incursions from trustees, even if property wasn’t. Lately there have been significant changes in this arena, so it is no longer the case.

The Welfare Reform and Pensions Act (1999) specified that pension monies could not pass automatically to a trustee in bankruptcy. This was on the basis that bankrupts in retirement would be less able to provide for themselves and consequently become a burden on the state.

However, Raithatha v Williamson [2012] established that a trustee can now secure an income payments order (IPO) to access a bankrupt’s tax-free lump sum from their pension – even if the bankrupt has no intention to ‘draw down’ any of their pension at that stage.

In this case, a bankruptcy order was made in November 2010 against a 59-year-old man, who was eligible to draw down a lump sum of up to about £250,000 from his £1m pension pot, in addition to an annual income of ?£23–43,000. Most times, a bankrupt is said to be discharged from bankruptcy after 12 months and a typical tactic for those with a healthy pension fund had been to delay drawing their pension until after they had been discharged. In Raithatha, the bankrupt adopted this approach but was compelled to hand over the full lump sum plus three years of annuity income.

Trustees know

The belief that pension funds are safe from a trustee in bankruptcy has led some private client advisers to suggest a client in financial difficulty transfers assets or cash into their pension. This is a fallacy.

A trustee in bankruptcy can, and likely will, investigate whether a pension has been used as an asset protection scheme. If they believe this, a trustee can recover excessive pension contributions that have unfairly prejudiced a bankrupt’s creditors.

Importantly, this does not have to have been an intentional consequence when the contribution was made, but only that it adversely impacted on creditors at the time of the bankruptcy order. It may be tempting to suggest ?this route as a positive course for clients, but a good trustee will find out.

For a bankrupt who has already been drawing a pension, a trustee in bankruptcy can apply for an IPO to take a proportion of those monies for a specified period but for a maximum of three years. However, the bankrupt’s reasonable domestic needs must be considered. Items such as private school fees are increasingly likely to be deemed reasonable, but general lifestyle expenditure is not.

When someone is declared bankrupt, it still comes as a surprise to many practitioners that a trustee in bankruptcy can compel advisers to yield up their ?files and records of advice. All legal privilege rests in the trustee because they are viewed as legally identical to the bankrupt themselves.

Trustees can play a key role in striking a balance between asset-rich individuals and their creditors, and mediating agreements in the interests of both sides. Any good trustee will review asset protection schemes with great care and may interrogate and attack any transaction that has adversely impacted on the body of creditors, for example undervalued transactions, such as gifting property, or preferential payments including attempts to repay family members before other creditors.

There are certain time limits and conditions surrounding these transactions, but it is vital for advisers to understand that this can, and will, be pursued wherever viable. More sophisticated schemes may be attacked in the courts as transactions defrauding creditors.

Private client advisers will be confronted with these issues more frequently as the UK’s population ages. ?So, understanding the playing field, the role of the trustee in bankruptcy and ?the options available are vital.

Trustees in bankruptcy: striking a balance New bankrupt ‘Joe Smith’ had accrued major liabilities with his sons. He maintained he had no assets, but lived in a substantial property and overwintered in Florida. As trustee, I determined that his UK property had been transferred into his wife’s name when he was incurring the liabilities, although he was solvent, on the balance sheet, at the time. Smith’s family claimed he owed them significant sums and demanded that any recovery would need to be shared with them if it was possible to pay a dividend in bankruptcy. I obtained documentation to show that I could have an interest in a condominium and an option on a new­build in the US. I commissioned a forensic analysis of bank accounts, in various currencies, to ascertain the truth. In fact, the family weren’t owed money, and trustee negotiation resulted in them withdrawing all claims and contributing a large sum to avoid unravelling associated asset protection schemes. The settlement was tied into an individual voluntary arrangement, so Smith could apply to court for a bankruptcy annulment.

Matthew Chadwick is insolvency practitioner and business restructuring partner at BDO