In this blog post we look at a Trustee in Bankruptcy’s right to access a bankrupt’s undrawn pension.
As a starting point, a bankrupt’s rights under an approved pension arrangement are protected from vesting in a Trustee in Bankruptcy[i] (TiB). Any undrawn pension therefore sits beyond the reach of a TiB. However, if the debtor begins drawing down his pension before his discharge from bankruptcy then the payments can be included in any calculation for an income-payments order (IPO).
In a departure from the previously understood position, the High Court held in a 2012 case[ii] that a bankrupt who had not elected to draw his pension before or during the bankruptcy could be compelled to do so by a TiB and this could include forcing him to take the maximum lump sum, to which a TiB could seek an IPO. The pension scheme in question was a personal pension arrangement where, upon reaching the minimum pension age of 55, the individual was entitled to request an immediate payment of his pension (the bankrupt was 59 at the date of the judgment). On this basis, the Court held that, whilst it was clear a bankrupt’s pension rights did not vest in his TiB, to the extent that an individual is entitled to request immediate payment of his pension, that entitlement is ‘income’ for the purposes of legislation[iii] and within the scope of assets that a court may require to be applied against creditor liabilities.
A recent decision in the High Court[iv] has now cast doubt on the position by declining to follow the 2012 case and grant an IPO compelling a bankrupt of pensionable age to draw down his pension and pay his lump sum and any income derived from the pension to his TiB.
The High Court case again concerned an application by a TiB for an IPO against a bankrupt’s pension policies that had not yet vested. These policies consisted of a Self-Invested Personal Pension (SIPP), of which the bankrupt was entitled to a 25% tax free lump sum of approximately £230,000, and a number of personal pension policies which would provide a combined annual annuity income of £2,450.
The bankrupt refused to draw down his various policies citing in evidence that he did not require his pension to meet his ordinary domestic needs and wished to preserve the maximum capital value of the policies in order to transfer them to his children when he died.
The TiB sought an IPO requiring the bankrupt to take the 25% lump sum from his SIPP, together with 36 monthly payments in flexible drawdown, and the annuity value of his personal pensions. Interestingly, the TiB also sought a right to apply for a variation of the IPO at a later date once the new pension flexibilities are in place in April of this year.
The Judge held that reference to ‘income’ in the legislation, and specifically income to which the bankrupt ‘becomes entitled’ did not include a bankrupt’s undrawn pension. The word ‘entitled’ suggested a reference to a pension in payment under which definite amounts had become contractually payable. Furthermore, the legislation did not permit the Court, or the Trustee, to require the bankrupt to elect to start drawing his pension.
In his judgment, the Judge acknowledged that he could not properly distinguish the 2012 case from the facts and, reluctantly, he had reached a different conclusion solely on the basis of his different interpretation of ‘entitled income’ under the legislation.
This decision seems to more accurately reflect the position that Parliament presumably intended to create when it enacted the legislation and should therefore be welcomed. However, this outcome means there are now two conflicting authorities on whether a TiB can gain access to a bankrupt’s undrawn pension benefits. We understand that permission to appeal the decision has been granted and so the Court of Appeal should provide some much needed clarity on this issue in the coming months.
This will be of increased importance when the new pension flexibilities come into force from April because if the 2012 case is correct, a TiB could potentially obtain an IPO in respect of the whole of a bankrupt’s pension savings.
[i] Section 11 of the Welfare Reform and Pensions Act 1999
[ii] Raithatha v Williamson  EWCH 909
[iii] Section 310(7) of the Insolvency Act 1986
[iv]Horton v Henry  EWHC 4209 (Ch)