Arecent high court ruling has transformed the way that pension assets can be considered under individual bankruptcy cases.
Until now, any assets held within a pension but where an income had not started to be taken have been exempt from individual bankruptcy proceedings.
However, the decision in April in the case of Raithatha v Williamson found that a bankruptcy trustee does have the right to force someone declared bankrupt to begin claiming his pension so that the commencement lump sum and a portion of the income can be used to satisfy the outstanding debt.
This decision could have serious implications for the thousands of people subject to bankruptcy proceedings every year.
Norton Rose pensions partner Peter Ford says: “A pension scheme is no longer a safe place in which an individual may seek to shelter funds from his creditors. The decision could allow creditors to claim against the pension funds of the 11,000 people over minimum pension age who enter bankruptcy every year.
“A bankrupt of scheme pension age, even when is he is still employed and working, with no intention of taking his pension, may be forced to access pensions savings to pay off creditors where he is entitled to draw benefits but chooses not to.”
The verdict in this case hinged on the fact that the bankruptcy respondent, Michael Roy Williamson, had passed the minimum age from which he could elect to begin receiving his pension benefits.
Williamson is 59 years old and under his pension scheme rules could begin to take his pension from the age of 55.
The outstanding debt in this case was just over £1.2m and as the bankrupt’s pension assets are estimated at between £900,000 and £990,000 the trustee for the bankruptcy applied for an initial payments order to compel Williamson to begin claiming his pension so the lump sum and income payments could be used to pay off some of the debt.
Springfields Business Recovery & Insolvency managing director and bankruptcy trustee in this case Situl Raithatha said: “This is an extremely important case and means that a trustee in bankruptcy has greater power when looking at pension entitlements and will in turn lead to better return to creditors generally.
“The pension fund in this case is estimated to be worth approximately £1m. This may lead to a claim to an immediate tax-free lump sum of approximately £250,000 and a substantial annuity which can also be claimed under an IPO for a period of three years.”
Although Williamson has been given leave to appeal the decision, Raithatha expects the ruling to have a wide-spread impact on current bankruptcy practice.
He says: “We have other similar cases going through the courts where applications have been or are in the process of being made. The sums involved overall will be significant and we are liaising with major stakeholders.”
In this case, the scheme rules allow the payment of the pension simply on the request of the scheme member, provided that they meet the minimum scheme pension age.
’We have other similar cases going through the courts where applications have been or are in the process of being made. The sums involved overall will be significant and we are liaising with major stakeholders’
As a result, anyone below the age of 55 at the date of the discharge of their bankruptcy will continue to have any pensions assets excluded from any bankruptcy proceedings.
Under the terms of this decision, bankruptcy trustees are also limited in the amount they can claim from pension assets. Although the bankruptcy trustee in this case is laying claim to the full pension commencement lump sum, it has not been confirmed whether this will be granted.
IPOs apply for a maximum of three years after they are granted. This time limit applies from the date the IPO was issued and so can potentially continue after a bankruptcy has been discharged subject to the three-year maximum.
The change in the legal protection for pension scheme assets could make a review of client pension schemes worthwhile.
As the ruling in this case hinged on the ability of the scheme member’s ability to receive his pension simply by asking for it, a pension scheme with an independent trustee or administrator which has some discretion over when benefits are taken could ensure pension benefits remain outside the reach of bankruptcy trustees.
A J Bell technical marketing manager Gareth James says: “This ruling will have an impact where the entitlement to take benefits is not limited by the discretion of other parties but where the member is simply entitled to draw their lump sum and pension once they reach 55.
“However, with many schemes, and in particular Sipps and SSASs, the member’s ability to draw benefits can be subject to the discretion of parties such as the scheme trustee or administrator or their employer.
“In those circumstances, the court is less likely to consider the member to be entitled to the benefits in a way that would make a claim under an income payments order possible.”