One of the pensions subjects that has had my attention recently has been that of pensions and bankruptcy, following the Raithatha v Williamsoncase earlier in the year.
The case, heard in April 2012, found that a trustee in bankruptcy could apply an income payments order to the undrawn pension that an individual bankrupt could be drawing from his pension scheme, as well as any income that he was already drawing.
This was a different interpretation of the law than had been previously allowed – it had been understood that, under section 310 of the Insolvency Act 1986, the trustee in bankruptcy is allowed three years’ recovery of income being received by the bankrupt person in excess of that needed to meet their and their family’s reasonable domestic needs. In this respect it was anticipated that pensions which had not been crystallised, even if they could have been, were not to be included. The Williamson case has overturned this.
Mr Williamson was aged 58 and had a pension plan which he had chosen not to crystallise. He was over the age at which benefits were accessible, but had not drawn his pension benefits – could these be made subject to an income payments order under section 310?
It was argued that the pension entitlements (a lump sum and/or an annuity) that a bankrupt person was entitled to receive, but had not yet elected to receive, constituted a “… payment in the nature of income which is from time to time made to him or to which he from time to time becomes entitled …”within the meaning of section 310(7), and therefore constituted income, by reference to which the court was entitled to make an income payments order.
So it appears the trustee in bankruptcy could take into account the pension that had yet to be drawn.
An interesting point is made at paragraph 35 of the judgement, where Deputy Judge Livesey asks “… whether the intention of the legislature was to preserve the technical difference so that a person whose election had preceded his bankruptcy would be bought into the s.310 regime, whereas the person who had not elected to take his pension would not, I ask myself – “why would the legislature want to do that?””
The court also looked at the nature of the payments that could be received from a pension plan and rejected the argument that income had to consist of periodic or regular payments. It concluded that there was nothing to prevent a one off payment or a number of one off payments at different times from different sources being classed as income for the purpose of an income payments order.
The case was given leave to appeal and the appeal was heard in November 2012. Unfortunately, the case was settled before the appeal and therefore the decision was vacated upon settlement.
This is an unsatisfactory result as the legal principles were given no further examination, the significance of this is that the first instance decision of the High Court Chancery stands as a precedent which should be followed.
As a precedent, this whole situation and the withdrawal of the appeal is of considerable benefit to trustees in bankruptcy who are dealing with bankrupt individuals with pension provisions. The trustee in bankruptcy will no longer be dependent on the pension having been drawn before being able to access it.
It appears that it will now be possible to compel an individual to take his pension benefits, thereby providing access to the bankrupt’s lump sum entitlement and pension income for a three year period.
The outcome leaves a couple of things to consider. It will be interesting to see how this develops with regard to buying an annuity or opting for drawdown.
But while the law now allows trustees in bankruptcy to target pensions assets, the practice for assessing an income payments order means the court must consider the reasonable domestic needs of a bankrupt person, and such needs are determined by reference to the circumstances of each case.
It would have been good to have a full appeal to clarify some of the legal issues, but, as it stands, pensions can be attacked.
I am sure that this will be challenged in a future case, and the argument made that the purpose of the legislation was to protect pension on bankruptcy.
There is one fly in the ointment from another case that was heard around the same time. The High Court decision in the case of Blight v Brewster also permitted access to pension savings to satisfy a debt.
In this case a debtor rather than a bankrupt was ordered to take his tax-free lump sum from his pension pot to meet the claims of his creditors.
In this case the judge considered there to be “a strong principle and policy of justice to the effect that debtors should not be allowed to hide their assets in pension funds when they have a right to withdraw monies needed to pay their creditors.”
I wonder if it is also relevant that the debt was created by fraud?
So, a new way of thinking or just a short term legal hurdle? We must wait and see.
Mike Morrison is head of platform marketing at AJ Bell