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Pension and bankruptcy: are the rules about to change?

Paloma Kubiak
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Paloma Kubiak

A High Court case is currently being appealed which could change the way pensions are treated and accessed when someone is declared bankrupt.

Currently a trustee in bankruptcy doesn’t have immediate access to an individual’s pension plan if no income is being drawn.

But an ‘Income Payments Order’ (IPO) can be used to access any income that the bankrupt person may be entitled to.

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 has become confused, especially with reference to three court cases heard since 2012.

In the Hinton v Wotherspoon case heard this year, the judge ruled that people facing bankruptcy proceedings may not have to hand over undrawn pension funds.

The judgment drew on an earlier case, Horton v Henry, heard in 2014, stating it was “plainly correct” that the High Court found undrawn amounts weren’t funds to which the bankrupt individual was entitled to and therefore couldn’t be made subject to an IPO.

For anyone aged 55 and over who has yet to elect to take their benefits, the judgment held that the mere existence of a drawdown fund is not sufficient to establish an ‘entitlement’ for the purposes of an IPO.

This is because at the point of taking benefits there are still decisions to be made – to take a lump sum, to take a drawdown income, to buy an annuity or to leave the funds untouched.

But an appeal hearing for the Horton v Henry case was heard in May 2016, making reference to the Raithatha v Williamson case heard in 2012.

Here, 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 means 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.

What does this all mean?

Mike Morrison, head of platform technical at AJ Bell, an online investment platform, said: “If the Raithatha ruling became a legal precedent or the Horton judgment were reversed, it could cause serious issues for those facing bankruptcy following the introduction of the pension freedoms.

“When the Raithatha judgment was passed the maximum that could be drawn from a pension fund (so to which an individual became ‘entitled’) was restricted. After 6 April 2015 this was no longer the case. The whole fund could be taken using the pension freedoms and therefore the whole fund value could have been included in the IPO.

Horton v Henry made more sense as it restricts the amount that can be included in the IPO, and this latest case also better reflects the original aim of the law.”

The result of the Horton v Henry appeal is due shortly and YourMoney.com will cover the case once the judgment has been published.