Bankruptcy Advice and Pensions
Bankruptcy Advice and Pensions – Are Undrawn Pensions Subject to Income Payment Orders?
The Bankruptcy advice that Insolvency practitioners give their clients is determined, sometimes, by Court of Appeal decisions. The Court of Appeal on the 7th October handed down a judgement against the 2014 Horton v Henry appeal which looked at whether undrawn pensions were subject to Income Payments Orders (IPO). This article looks at the main points arising from the judgement, which ruled that a bankrupt cannot be compelled to draw down their pension by an IPO.
Recap over Bankruptcy and Trustees
When an individual becomes bankrupt and a trustee in bankruptcy (Trustee) is appointed, all assets to which the individual is beneficially entitled vest automatically in the Trustee, as the bankruptcy estate. The Trustee’s function is to realise the value of the assets in the bankruptcy estate and to effect distribution to the bankrupt’s creditors in settlement of his debts.
If an individual’s pension is in payment at any point between the date of the bankruptcy order and its discharge, it may be brought within the bankrupt’s estate if the Trustee applies to the court for an IPO from the Court. The IPO could compel the bankrupt to pay some or all of that income to the Trustee for inclusion in the bankruptcy estate.
The extent to which an individual’s pension benefit can be accessed by the Trustee is dependent on:
- the type of pension scheme (registered with HMRC, or unregistered);
- whether excessive pension contributions have been made; and
- whether the pension is in payment, or is a deferred or postponed pension
Unregistered pension scheme treatment
A bankrupt’s pension benefits held under an unregistered pension scheme will automatically vest in the Trustee and can be used by the Trustee to pay the individual’s creditors. However, if the unregistered scheme is the individual’s sole or main pension scheme, he can apply to the Court for it to be excluded. The Court will make an order to allow such exclusion only if it considers that the needs of the individual and the individual’s family are not adequately met from other pension arrangements.
Excessive contributions to a registered scheme
A Trustee can apply to the Court where excessive contributions have been made to a registered pension scheme, under section 342A(1) of the Insolvency Act 1986 and section 15 of the Welfare Reform and Pensions Act 1999 (the WRPA 1999).
In order to grant such an order, the Court needs to be satisfied that excessive contributions have unfairly prejudiced creditors under section 342A(1)(b) of the IA 1986. The Court will consider whether the purpose of excessive contributions was to attempt to put assets beyond the reach of the bankrupt’s creditors.
Pension in payment, deferment or postponement
As noted above, the Trustee can apply for an IPO in respect of income the bankrupt is receiving during the bankruptcy process. This includes any pension payments the bankrupt may be receiving. There has been uncertainty as to whether a deferred or postponed pension can be the subject of an IPO and this question lay at the heart of the recent conflicting High Court cases of Raithatha v Williamson  (Raithatha), Horton v Henry  (Horton) and Hinton v Wotherspoon  (Hinton).
Conflicting case law had meant that the position regarding pensions was unsettled as all leading cases had been decided at High Court and therefore none had precedence. However, as the Horton appeal has been dismissed, we can say that unless and until this decision is reviewed by the Supreme Court a bankrupt cannot be compelled to draw down their pension by an IPO. Excessive contributions, unregistered schemes and pensions in payment are unaffected by the decision.
Contact us regarding Bankruptcy and Trustees
As insolvency practitioners, we act on many bankruptcies and give bankruptcy advice. If you would like any clarification regarding this judgement regarding bankruptcy and pensions, please contact us or call us on 0208 088 0633.