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Peter Hamilton: Rights over pensions in bankruptcy

Can a trustee in bankruptcy require a bankrupt to elect to take his pension?

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Under section 310 of the Insolvency Act 1986, a trustee in bankruptcy can get an order from the court that the bankrupt must pay any income to which the latter is entitled into the estate for the benefit of his creditors. This is provided the bankrupt has enough income left in his own hands to meet the “reasonable domestic needs of [him] and his family”.  Such an order is known as an income payments order.

As regards pensions, prior to 2012, although pension policies did not form part of a bankruptcy estate, there was no doubt an IPO could include the amount due to the bankrupt in respect of a pension that was already in payment, as the bankrupt was entitledto those amounts. But it was generally accepted a bankrupt was not entitled to receive anything from a pension not already in payment because he still had to exercise the various options open to him: for example, as to the taking of tax-free lump sums and the timing of payments.  Thus an IPO could not include anything from an uncrystallised pension.

In 2012, however, a judge in the High Court in a case called Raithatha v. Williamson decided “a bankrupt does have an entitlement to a payment under a pension scheme not merely where the scheme is in payment of benefit but also where, under the rules of the scheme, he would be entitled to payment merely by asking for payment”.  The scheme in that case was a personal pension plan with a fund value of about £900,000.

This decision caused considerable uncertainty and dismay to practitioners because it raised the risk the new flexibility in pension drawdown could expose the pension savings of a bankrupt to an IPO even if the pension was not yet in payment. For example, a bankrupt could be forced to exercise his option under the rules of the pension scheme to take the maximum lump sum and pay it to the trustee under an IPO where it exceeds the bankrupt’s reasonable needs.  The decision was also criticised because the judge gave no assistance to other courts as to the principles a court should adopt when making an IPO.

Then, late last year, another case came before a different judge in the High Court and he reached a different conclusion. The case in question was Horton v. Henry. It concerneda Sipp and three other personal pension policies. The Sipp had a fund value of about £900,000 but the other policies had no fund value. On the authority of the Raithatha decision, the trustee in bankruptcy applied for an IPO although all the pensions were not yet in payment. The bankrupt’s evidence was that he did not wish to crystallise his pensions and would prefer his Sipp should continue to enjoy the prospect of tax-free capital growth and should pass to his children in due course. The judge had to consider the correctness of the Raithatha decision.

The judge pointed out pensions have attained a privileged status for the purposes of insolvency law and that section 11(1) of the Welfare Reform and Pensions Act 1999 had taken all rights under most types of pension out of a bankrupt’s estate.

He also recognised the bankrupt was entitled to the sums paid under a pension in payment but said, “… uncrystallised pensions envisage further steps beyond merely asking for payment. The pension holder has to make elections among a range of potential benefits before he is entitled to receive any specific payment or payments”. He went on to say “there is no obvious wording in section 310… which would give the court power to decide how a bankrupt is to exercise the different elections open to him under an uncrystallised Sipp or personal pension. Nor is there any obvious route for a trustee in bankruptcy to be said to have the power”.

Contrary to the decision in Raithatha, the judge concluded the bankrupt was not entitled to payment under his pensions “merely by asking for payment”.

“There is a considerable variety of options open to him. It would only be after he had made elections that any payment would be due to him. Only then would he become entitled to any payment. I do not consider there is any power in the court under section 310 or in the trustee to require [the bankrupt] to elect in any particular way,” he said.

It followed that the trustee’s application failed. But the case has gone to the Court of Appeal to resolve the disagreement between the two judges. The appeal is likely to be heard some time in the next few months. Although it is probable the Court of Appeal will prefer the second decision, there remains a risk a bankrupt would be forced to drawdown a pension not yet in payment by a trustee in bankruptcy. Watch this space.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk 

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