Pensions and Bankruptcy – An Update

September 24, 2015

Back in August 2013 we published an Article “Pensions and Bankruptcy-Extended Powers for a Trustee in Bankruptcy?” This article considered the implications of bankruptcy and pensions following the leading cases at the time, namely Raithatha v Williamson [2012] EWHC 909 (Ch) and Blight & Others v Brewster [2012] EWHC 165 (Ch). Since then, there have been a number of developments within the bankruptcy and pension arena which merit further consideration.

The first main development is the case of Horton v Henry [2014] EWHC 4209 (Ch). This case involved an application made by Mr Henry’s Trustee in Bankruptcy in December 2013 for an Income Payments Order pursuant to Section 310 of the Insolvency Act 1986 (the Act). The application was made in respect of a Self Invested Pension Policy (SIPP) and three personal pension policies all held in the Bankrupt’s name. The Bankrupt had petitioned for his own bankruptcy in December 2012, and it appeared that his bankruptcy creditors were in the region of £6.5 million.

In this case, as was the case in Raithatha, the Court noted that the subject pension policies were not presently “in payment” but were “capable of crystallisation”. The court acknowledged that the two key questions for them to consider were:-

1) Whether the Court had the power under Section 310 of the Act to make an Income Payments Order in respect of a pension which was not in payment and

(2) If there was such a power, what amount, if any, out of sums to be drawn from the Bankrupt’s pension should be retained by the Bankrupt rather than paid to his Trustee?

Focusing largely on question 1, the Judge concluded that he did not agree with the dicta of the Raithatha case, and stated that he had come to a different conclusion with “considerable reluctance”. He held that following his own review and interpretation of the relevant provisions within the Act, the Bankrupt was not entitled to payment under his pensions “merely by asking for payment”, as was being claimed by the Trustee. The Judge held that the Bankrupt had a “considerable variety of options open to him” and that it “would only be after he had made elections that any payment would be due to him and only then would he become entitled to any payment”. The Judge clearly therefore departed from the ruling in Raithatha and held that he did not believe that the court had any power under Section 310 to require the Bankrupt to elect.

Unsurprisingly, Mr Henry’s Trustee has appealed this case and we understand that the appeal is due to be heard in January 2016.

The second main development is the impact of the new pension legislation which came into effect from 6 April 2015. One of the main changes within this legislation is that it now allows individuals to access the entirety of their pension pot once they reach the age of 55 years (as opposed to only being able to draw down 25% as a tax free lump sum as was previously the case).

This could potentially mean that the entire pension pot of an undischarged bankrupt over 55 is exposed to attack by a Trustee in Bankruptcy for an Incomes Payments Agreement/Order. Clearly this does not comfortably sit alongside the main purpose of the Welfare Reform and Pensions Legislation in both Northern Ireland and England, which was introduced primarily to protect certain pensions in the event of bankruptcy. To date, the Government have offered little guidance or comment on the potential implications of the recent legislation.

Trustees in Bankruptcy will be eagerly awaiting the outcome of the appeal in the Horton v Henry. If the Court of Appeal overturns the decision of first instance, and follows the decision from Raithatha, this may open the doors for a test case to be brought by a Trustee wishing to obtain an Income Payments Order/Agreement in respect of the entirety of a bankrupt’s pension pot.

This article was produced by Caitriona Morgan, Associate Solicitor

Please note; the content of this article is for information purposes only and further advice should be sought from a professional legal advisor before any action is taken.