The Court of Appeal has upheld the High Court’s decision, confirming that an application from a trustee in bankruptcy for access to a bankrupt’s pensions which were not yet in payment should be rejected.
Income Payments Order
When an individual becomes bankrupt and a trustee in bankruptcy (“TiB”) is appointed, under insolvency law all assets to which they are beneficially entitled vest automatically in the TiB.
If the bankrupt receives an income during their bankruptcy, the TiB may apply for an Income Payments Order (“IPO”) in order to compel the bankrupt to pay some or all of that income to the TiB.
Pensions and bankruptcy
Since 29 May 2000, all “approved pension arrangements” (including occupational and personal pension schemes) have been excluded from a bankrupt’s estate. However, the TiB can obtain an IPO against any pension or lump sum that has come into payment, or to which the bankrupt is “entitled”, during the bankruptcy.
Prior to this appeal, there was conflicting case law on how an IPO could be applied to an individual’s pension arrangements.
In Raithatha v Williamson (“Raithatha”) the High Court held that a bankrupt’s right to receive income from his personal pension could be the subject of an IPO, even though he had not elected to draw his pension (so, in effect, compelling him to draw it). The judge had concluded that a bankrupt has “an entitlement to a payment under a pension scheme not merely where the scheme is in payment of benefit but also where, under the rules of the scheme, he would be entitled to payment merely by asking for payment”. The case was settled before appeal, so its impact, particularly on occupational pension schemes, was unclear.
In contrast, the first instance decision in Hinton v Wotherspoon followed the High Court in Horton – which had rejected the application of the TiB for access to pension not yet in payment – holding the Horton decision to be “plainly correct”.
Mr Henry was adjudged bankrupt in December 2012, aged 58. His assets at that time included four pension policies – a SIPP and three further personal pension policies.
The trustee in bankruptcy sought an IPO over the 25% tax free lump sum potentially available from the SIPP, 36 monthly payments from the SIPP in flexible drawdown and the annuity value of the personal pensions for the next three years. In order to bring these benefits into payment, Mr Henry would have needed to crystallise his SIPP and personal pension policies.
In evidence, Mr Henry had stated that he did not need to access his pensions in order to meet his ordinary domestic needs (he said that he relied on friends and family to help meet these). Instead, he wanted to preserve his underlying pension funds intact for as long as possible, with the aim of passing on his SIPP to his children in due course. He therefore had no intention of drawing down his pensions.
The Court considered whether there was power to make an IPO in respect of a pension which is not in payment, examining the statutory provisions relating to how a bankrupt’s property vests in a TiB.
The Court held that the statutory position is that all property vests in a TiB, subject to explicit exceptions. Rights under pension schemes are one such exception, and are therefore protected; income which stems from a pension arrangement is not. The judge (Lady Justice Gloster) cited the Explanatory Notes to the Welfare Reform and Pensions Act 1999 (“WRPA”) as helpful in clarifying the position.
She also found that as a matter of construction, that there is no basis to conclude that a bankrupt’s contractual rights to draw down a pension come within the definition of “income of the bankrupt”.
The Court held that a TiB could not require a bankrupt to convert excluded property (in the form of pension rights) into income. The judge commented that the court had not been “referred to any authority which supported the proposition”, and noted analogous situations: it “was common ground, for example, that a trustee could not require a bankrupt to work so as to receive a salary that might be subject to an IPO”; nor could a bankrupt be forced to request a payment from a discretionary trust of which they were a beneficiary.
The Court noted that there is power under the Insolvency Act 1986 which permits the recovery of excessive pension contributions if the bankrupt is considered to have attempted to abuse the protection of the WRPA and thereby unfairly prejudiced their creditors. The judge cited this as evidence that Parliament has decided to draw a line between “protecting the interests of creditors on the one hand and safeguarding the savings of private pension holders on the other.”
Finally, the judge commented that, if the TiB were correct that an IPO should be made, the courts would have to determine the precise election that the bankrupt should make – both the amount of drawdown, and the manner of payment. She noted that the legislation specifies no such criteria, and agreed with the High Court judgment, that this is a “formidable obstacle to the trustee’s arguments”.
It is useful to now have clarity in this area.
It also removes some potential difficulties that the Raithatha scenario would have given rise to – for example, determining how and when benefits should be brought into payment when various options would be open.