Many have thought that private pensions are protected from a bankrupt's creditors provided that the bankrupt is not yet receiving his pension (subject to a claim that the contributions were excessive). However, a High Court decision on 4 April 2012 has changed this view. The Court said that creditors may be given rights where bankrupts could have drawn a pension but have not yet done so.
In Raithatha v Williamson [2012] EWHC 909 (Ch), the bankrupt had various pension policies which provided a choice of benefits, including a tax-free lump sum and regular payments. The bankrupt had reached retirement age and so could have received these pension payments, but he had decided to not yet do so. The trustee in bankruptcy applied for an income payments order (an IPO) under Section 310 of the Insolvency Act 1986. In his application, the trustee asked for the IPO to cover the bankrupt's undrawn pension. The bankrupt argued that the Court could not make the IPO.
The Court decided that an IPO could be made in respect of the undrawn pension. Under insolvency law, the Court can make an IPO in relation to a pension "entitlement". The Court said that a bankrupt has an "entitlement" to a pension if he would receive one merely by asking for it. It is not necessary for a bankrupt to have started to receive the pension payments.
The Court considered that the IPO legislation intended this result. The Government was unlikely to have intended to create a difference between bankrupts who had decided to draw their pensions before bankruptcy and those who had not. Such a difference in treatment would be difficult to justify.
The Court also decided that lump sum payments could still be "income" for the purposes of an IPO. It said that payments do not have to be periodical or regular to be "income".
Points for Insolvency Practitioners
This case changes the previous view that an IPO (or a consensual Income Payments Agreement) would only be available in respect of a pension which was already in payment. It appears that there is now greater scope for seeking IPOs where the bankrupt has a right to request payment but has not yet done so. In particular, such an IPO could extend to cover the lump sum payment of 25% of the total pension pot which many pension holders will be entitled to request.
The decision in Raithatha is consistent with an earlier decision in March 2012 in Blight v Brewster [2012] EWHC 165 (Ch), in which the High Court upheld a third party debt order in relation to a judgement debt where the debtor was not in bankruptcy. The order had the effect of requiring the debtor to exercise his right to withdraw a lump sum from his pension fund. This shows an increasing willingness for the courts to prevent debtors from sheltering their assets in pension funds when they could access funds to pay their creditors.
The situation will vary depending on the kind of pensions held by the bankrupt. For example, a personal pension is more likely to give the pension holder the option of requesting or delaying payment than an occupational pension. Insolvency practitioners should now take particular care to obtain precise details of the pension scheme(s) of which the bankrupt is a member and advice on the options.
Note that the decision in Raithatha is subject to appeal. We will monitor developments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
