In Focus

Can a Trustee in Bankruptcy get hold of the bankrupt’s personal pension?

Can a Trustee in Bankruptcy get hold of the bankrupt’s personal pension?

In the late 1990s, a series of decisions established that a bankrupt’s rights in a personal pension formed part of the estate in bankruptcy, regardless of whether the bankrupt was of an age that entitled him to draw on the pension. In response to these decisions, Parliament changed the law under the Welfare Reform & Pensions Act 1999 so that for bankruptcies occurring after April 2000, personal pensions were no longer included within the assets that vested in the Trustee. The law appeared to be settled once and for all.

However, in April 2012 an enterprising Trustee in Bankruptcy sought to get hold of some of the bankrupt’s rights through an application for an income payments order. The bankrupt, Mr Williamson, was of an age where he was entitled to draw on his pension, if he so wished, and the Trustee Mr Raithatha argued that this meant the pension benefits were at the bankrupt’s disposal, and therefore should be considered income that the bankrupt was entitled to receive, regardless of whether he actually claimed it. The High Court agreed with the consequence that Mr Williamson was directed to pay to the Trustee a sum equivalent to the tax free 25% lump sum he was entitled to draw down from his pension fund. Mr Williamson took steps to appeal this decision, but matters were then compromised so the Court of Appeal did not have the opportunity to say whether the decision was correct.

On the basis of the decision in Raithatha v Williamson, the Official Receiver and Trustees in Bankruptcy have required bankrupts to pay over their 25% lump sum payments, where the bankrupt is old enough to draw down on their personal pension. If the bankrupt was not quite old enough at the date of the bankruptcy order, then the Official Receiver or Trustee in Bankruptcy could still get hold of the lump sum by obtaining an income payments agreement or order for a 3 year period, and then requiring the amount payable under the agreement or order to be increased as and when the bankrupt reaches the relevant age. Typically, this has meant that anyone who is aged 52 or more at the date of bankruptcy will find their pension fund under attack.

Recently, the Raithatha v Williamson decision has been causing great consternation because of the changes to pension law that will come into effect from 6 April 2015. From that date, those entitled to personal pensions will be able to access the entire fund, not merely the 25% lump sum. Will this mean that Trustees in Bankruptcy will be able to force the bankrupt to pay over the entire pension fund? If so, that would go completely against the policy decision that Parliament made in 1999. Yet the Treasury is currently saying it has no plans to change the law to overrule the Raithatha v Williamson decision.

In the meantime, it now seems certain that it is only a matter of time before the Court of Appeal is asked to make a decision on whether Raithatha v Williamson was correctly decided. On 17 December 2014, the High Court considered a similar set of circumstances in a case called Horton v Henry. The Judge disagreed with the legal analysis in Raithatha v Williamson and concluded that the bankrupt was not entitled to the 25% lump sum, in a manner that would require that sum to be considered income for the purposes of an income payments agreement or order.  The Judge said that the bankrupt had the power to make decisions in relation to the pension fund,  and the consequence of exercising those powers in a particular way would mean the bankrupt could access the 25% lump sum, but the Trustee could not compel the bankrupt to exercise the powers in that way. 

It is expected that the Insolvency Service will appeal the decision in Horton v Henry to the Court of Appeal.  If the Court of Appeal agrees with the Judge, then the concerns about the forthcoming changes to pension law will evaporate.

In the meantime, bankrupts will use the Horton v Henry decision as a reason why pension benefits should not be taken into account when assessing the sums payable to the Official Receiver or Trustee in Bankruptcy under an income payments agreement or order.

Previous article

Next article