New freedoms for pensions after April could force savers to use their savings pot to pay off any debts
The number of people becoming insolvent in England and Wales has fallen to its lowest level in nearly a decade, according to official data.
But while the number of people going bankrupt is just a third of what it was five years ago, the headline figures disguise a surge in the take-up of a form of insolvency dubbed “bankruptcy lite”: the individual voluntary arrangement (IVA).
The data has prompted warnings that the new pension freedoms being introduced in April may mean creditors are able to force debtors to break into their pension pot in order to pay what they owe.
The Insolvency Service said there were a total of 99,196 individual insolvencies in 2014 – the first time the figure has dropped below 100,000 since 2005.
The number of bankruptcy orders issued fell to 20,318, which was 17% down on 2013 and the lowest figure since the late 1990s. Further falls could be on the way after the government announced a shake-up of the bankruptcy regime, including a seven-fold increase in the minimum amount of debt necessary to trigger this most serious form of insolvency.
One of the less drastic alternatives to bankruptcy is the debt relief order (DRO), and the number of these being made has also fallen – to its lowest level since 2010.
By contrast, England and Wales are seeing a boom in the number of IVAs, which are now by far the most popular form of insolvency. There were 52,190 IVAs in 2014 – the highest annual total since they were introduced in 1987.
An IVA allows a struggling borrower to restructure his or her debts – it is an agreement with creditors where the individual makes regular payments to an insolvency practitioner, who then divides this money between their creditors, such as personal loan companies, credit and store card providers and catalogue firms. IVA providers have traditionally advertised heavily on daytime television, and some have been censured for making exaggerated claims about the amount customers can write off.
Commenting on the figures, Mark Sands at accountants Baker Tilly said: “In a sense, conditions for those with problem debts couldn’t be better. Interest rates are at historic lows, we know that they are going to stay at that level for longer than we originally thought, and creditors are increasingly willing to engage with debtors to agree informal repayment plans over formal insolvency procedures.” He added that the surge in IVAs was “a sign that people are feeling confident enough about their financial prospects to commit to a five-year repayment plan rather than opting to walk away from their debts by entering into a debt relief order or bankruptcy”.
However, there was a warning of a potential threat lying in wait for those in debt who have pension savings. From 6 April, any requirement to convert a pension pot into an annuity will be abolished, and more than 300,000 individuals a year with defined contribution pension savings will be able to access them as they wish after the age of 55. Steve Rees of Vincent Bond, a debt solutions company, said this meant older people wrestling with debt problems may be tempted to withdraw money from their pension pot to pay off their debts. At the same time creditors such as banks may also be able to access the money to settle debts, leaving people with little or no pension.
“Recent high court decisions have created uncertainty about how people in formal debt solutions such as bankruptcy may be forced to release funds from their pensions. This, sadly, marks a significant departure from the accepted treatment of pensions on bankruptcy, which previously were beyond the reach of a trustee in bankruptcy,” Rees said.
But while the number of people going bankrupt is just a third of what it was five years ago, the headline figures disguise a surge in the take-up of a form of insolvency dubbed “bankruptcy lite”: the individual voluntary arrangement (IVA).
The data has prompted warnings that the new pension freedoms being introduced in April may mean creditors are able to force debtors to break into their pension pot in order to pay what they owe.
The Insolvency Service said there were a total of 99,196 individual insolvencies in 2014 – the first time the figure has dropped below 100,000 since 2005.
The number of bankruptcy orders issued fell to 20,318, which was 17% down on 2013 and the lowest figure since the late 1990s. Further falls could be on the way after the government announced a shake-up of the bankruptcy regime, including a seven-fold increase in the minimum amount of debt necessary to trigger this most serious form of insolvency.
One of the less drastic alternatives to bankruptcy is the debt relief order (DRO), and the number of these being made has also fallen – to its lowest level since 2010.
By contrast, England and Wales are seeing a boom in the number of IVAs, which are now by far the most popular form of insolvency. There were 52,190 IVAs in 2014 – the highest annual total since they were introduced in 1987.
An IVA allows a struggling borrower to restructure his or her debts – it is an agreement with creditors where the individual makes regular payments to an insolvency practitioner, who then divides this money between their creditors, such as personal loan companies, credit and store card providers and catalogue firms. IVA providers have traditionally advertised heavily on daytime television, and some have been censured for making exaggerated claims about the amount customers can write off.
Commenting on the figures, Mark Sands at accountants Baker Tilly said: “In a sense, conditions for those with problem debts couldn’t be better. Interest rates are at historic lows, we know that they are going to stay at that level for longer than we originally thought, and creditors are increasingly willing to engage with debtors to agree informal repayment plans over formal insolvency procedures.” He added that the surge in IVAs was “a sign that people are feeling confident enough about their financial prospects to commit to a five-year repayment plan rather than opting to walk away from their debts by entering into a debt relief order or bankruptcy”.
However, there was a warning of a potential threat lying in wait for those in debt who have pension savings. From 6 April, any requirement to convert a pension pot into an annuity will be abolished, and more than 300,000 individuals a year with defined contribution pension savings will be able to access them as they wish after the age of 55. Steve Rees of Vincent Bond, a debt solutions company, said this meant older people wrestling with debt problems may be tempted to withdraw money from their pension pot to pay off their debts. At the same time creditors such as banks may also be able to access the money to settle debts, leaving people with little or no pension.
“Recent high court decisions have created uncertainty about how people in formal debt solutions such as bankruptcy may be forced to release funds from their pensions. This, sadly, marks a significant departure from the accepted treatment of pensions on bankruptcy, which previously were beyond the reach of a trustee in bankruptcy,” Rees said.
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