Individuals facing bankruptcy could be at risk of having their entire pension fund stripped to pay debts when new pension freedoms come into force next year as a result of a landmark case in 2012 not having been overturned, experts have warned.
An overhaul of pension tax rules that will come into force from April 2015 will mean a pension scheme member at age 55 can withdraw their entire pension fund.
A landmark ruling in the High Court in the case of Raithatha v Williamson, saw bankruptcy trustee Situl Devji Raithatha win the right to claim against Michael Roy Williamson’s £1m pension fund to repay creditors using an “income payments order”.
Although the court agreed that the right to draw his pension fell outside the bankruptcy estate, it held that the power to issue an order could be exercised on any amount of money to which the individual would be entitled “merely by asking for payment”.
In practice this would mean the 25 per cent tax-free lump sum could be targeted as this is the sum a scheme member is entitled to immediately access under current rules.
Under new freedoms, warned Robin Davis, a consultant at Bray and Krais Solicitors, the individual could ask for the entire fund from April, meaning in theory this is the sum against which a bankruptcy trustee could apply an income order.
He said: “As long as the decision in the Raithatha case remains the law, workers who become bankrupt could find the whole of their pension pot being subject to an income payments order, not just 25 per cent as now.
“This could affect all workers over 52 years of age, as trustees in bankruptcy have a right to make claims in respect of all income arising during the period of three years after the date of a bankruptcy order, which brings into scope a bankrupt’s right to their pension pot at 55.”
Mr Williamson appealed the original decision and the case was settled out of court, meaning the legal interpretation remains unchanged.
Mike Morrison, head of platform technical at AJ Bell, added: “In the past, the amount a trustee in bankruptcy could attach was perhaps the lump sum and the maximum GAD limit, but now with the new freedoms it’s the total fund.”
He pointed out that under the Welfare Reform and Pensions Act 1999 pensions had been protected in bankruptcy due to the “public policy argument” that retirement savings should be kept separate.
He continued: “The court case overturned that to some extent, although we’ve never seen anyone test that case so my thoughts are that this needs another court case to decide whether the public policy argument needs re-stating.”
According to Mr Davis, many insolvency practitioners consider the Raithatha case to be wrongly decided.
He concluded: “It remains to be seen whether the coalition government will make statutory provision for the situation to be restored to its current position.”
peter.walker@ft.com
