Is My Pension Safe in Bankruptcy?
by John Gordon
One of the most frequent questions asked of Insolvency Practitioners; is my pension policy in danger!. The law on this has been clouded in recent years due to a poor legal decision known as Raithatha v Williamson which suggested that a bankrupt’s right to receive income from his personal pension could be the subject of an Income Payments Order, even though he not elected to draw down his pension. Unfortunately the case was settled before it went to the Court of Appeal so there was no opportunity for the law to be clarified until two decisions this year, known as Hinton –v- Wotherspoon and Horton v Henry.
In the first case the High Court stated that an individual who had entered drawdown and elected to receive an income from that drawdown fund is entitled to the income from it. As a consequence the income may be subject to an “Income Payments Order” from a Trustee in Bankruptcy. An income payments order depends on having “ excess disposable income” However, crucially the Judge went on to say “if an election has not been made the mere existence of a drawdown fund, whether invested or not in cash is not enough to establish an entitlement”.
Since May 2000 all “approved pension arrangements” including most occupational and personal pension schemes have been excluded from a bankrupt’s estate. As bankruptcy only lasts generally for one year, it is crucial that a bankrupt obtains sound advice as to what he should do regarding his pension, either before or during bankruptcy. If the bankrupt draws down his pension during his bankruptcy, it will be regarded as income and may be subject to an Income Payments Order.
In a case in 2014 known as Horton v Henry, the High Court held that undrawn pension amounts did not constitute funds to which the bankrupt was entitled and therefore could not be made subject to an Income Payments Order and that the court did not have the power to require Mr Henry (or indeed any bankrupt) to elect to draw down his pension in any particular way within the context of an application by a trustee in bankruptcy (trustee) for an income payments order (IPO). The decision was upheld in the Court of Appeal in October this year. In that particular case it is also worth noting that in assessing the bankrupts “reasonable domestic needs” for the purposes of determining the amount of the Income Payments Order, the Court allowed the cost of private health care insurance, despite the fact that the Insolvency Service guidance does not normally allow this as part of the bankrupt’s expenditure. However, in that particular case the bankrupt had on-going health problems which meant that if the policy was terminated he would not be able to renew it after the expiry of the Income Payments Order and the Court did not consider this to be fair or reasonable.
The current law now states that pension income that is the subject of a drawdown arrangement may be taken into account in determining an application for an Income Payments Order. However, it is absolutely crucial to determine exactly what the available pension drawdown is. If the pension income is the only income for the family it may well be the case that it is being used for the reasonable domestic needs and therefore should be unavailable to a Trustee as “surplus to disposable income”.
When someone isconsidering either self-adjudicating themselves bankrupt or indeed has been adjudicated bankrupt and has funds in a pension pot, they should seek advice and there is no better place than Napier & Sons where we have three licensed Insolvency Practitioners with significant experience in this area.