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Quick on the draw

Bankrupts could find pensions being used to pay off creditors

Pensions – are they safe from creditors? Well, certainly that had always seemed to be the case but a landmark decision handed down by the High Court on April 4 may just have changed that perception.

In the case of Raithatha v Williamson, it was decided that Williamson, who had an entitlement to draw his pension which he did not exercise before filing for bankruptcy, could have an income payment order applied to it.

Although Williamson had reached pension age under the scheme, he had continued to work without taking his benefits. The outcome was that the trustee in bankruptcy (Raithatha) was successful in obtaining a court order compelling Williamson to draw his pension and apply that “income” towards satisfying his creditors. The value of the accumulated pension fund was significant, estimated to be about £900,000, and there were two issues that were of concern. The secondary issue was if Williamson might take action to put his pension savings outside the reach of the trustee in bankruptcy. To combat this, the trustee applied for and received an injunction “without notice”.

The primary issue was whether the High Court could compel Williamson to take his pension or if the trustee could exercise that power on his behalf. Various arguments were put forward in defence of the situation by Williamson’s counsel, including:

  • That Williamson, not the trustee in bankruptcy, had the right to decide when, how and in what form he took his pension benefits.
  • An income payment order could not apply to uncrystallised payments of pension.
  • The court did not have the power to make Williamson elect to draw his pension. Indeed, it would breach his right to property under the European Convention on Human Rights to make him do so.

These arguments were all rejected by the court which offered no sympathy with the argument that applying an income payment order would breach his human rights.

As a matter of interest, Williamson’s counsel had also contended that any lump-sum entitlement was not “income” for the purposes of section 310 of The Insolvency Act 1986.
However, the court maintained that the fact that a payment was not periodical or regular did not prevent it from being classed as income.

As a consequence of this judgment, we might well conclude that a pension scheme is no longer a means of sheltering funds from creditors. More to the point, the door could be open to thousands of people in a similar position having their pension savings come within the reach of a trustee in bankruptcy.

Although the court has granted leave for Williamson to appeal, anyone in a similar position (or fears they might be in the future), who is eligible to draw their pension but chooses not to do so may be forced to access them to pay off creditors.

Mark Pearson is business development director at Origen Financial Services

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