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Over 55s facing bankruptcy won’t need to hand over undrawn pension funds

Paloma Kubiak
Written By:
Paloma Kubiak

Individuals facing bankruptcy shouldn’t be forced to cash in their undrawn pension pots to pay off debts, the court of appeal has ruled.

Judgment was today passed on the Horton v Henry case which was originally heard in 2014. It centred on whether a bankrupt individual who is subject to an Income Payments Order (used to access any income they may be entitled to) can be forced to withdraw some or all of their pension to cover the debt.

At the time, the judge decided there was no entitlement to undrawn funds in a pension in the event of bankruptcy which meant they couldn’t come under the Income Payments Order (IPO).

But with the dawn of pension freedoms that allow those aged over 55 unfettered access to their pension pots with the first 25% being tax-free, the law in terms of bankruptcy become confused, and the case ruling was counter to an earlier case heard in 2012.

In the Raithatha v Williamson case heard in 2012, the High Court held that an undrawn pension could be included in an IPO. The case also confirmed that any lump sum payments which the bankrupt person could opt for under the pension schemes rules counted as income, not just pension payments.

Essentially this meant that if someone facing bankruptcy was above the minimum pension age (55) the Court could force them to choose a draw down policy to satisfy the conditions of an IPO to repay their debts.

But a third case was also considered as part of the Court of Appeal judgment: Hinton v Wotherspoon, which was heard this year. Here the judge ruled that people facing bankruptcy proceedings may not have to hand over undrawn pension funds.

See YourMoney.com’s Pension and bankruptcy: are the rules about to change for more information on the cases.

Given the conflicting judgments in the similar cases, the Court of Appeal has today dismissed an appeal against the Horton v Henry ruling. This means that anyone in drawdown but not taking any income can’t be forced to start taking any money.

AJ Bell pensions expert, Mike Morrison, said: “The pension freedoms fundamentally changed the way savers can spend their retirement pot.

“As a result, if the original ruling in Raithatha v Williamson had set a precedent, someone aged 55 or over facing bankruptcy could also have been forced to cash in their pension savings where an IPO was issued – whether they liked it or not.

“This would have added pension pain to financial misery, and anyone in this position should be able to breathe easier in the knowledge the UK legal system appears to acknowledge pensions should be out of the reach of a bankruptcy trustee.”

The Court of Appeal judgment applies in England and Wales, however AJ Bell said today’s ruling can be appealed.