Personal Pension  

Court ruling protects pensions from bankruptcy claims

Court ruling protects pensions from bankruptcy claims

People facing bankruptcy proceedings do not have to hand over undrawn pension funds, the High Court has ruled.

In Hinton v Wotherspoon [2016], heard in the High Court in May, the judge upheld an earlier decision in the case of Horton v Henry [2014] that undrawn pension amounts were not funds to which the bankrupt individual was entitled, and therefore could not be made subject to an income payments order (IPO) in bankruptcy claims.

The implications of the Hinton v Wotherspoon ruling are more pronounced following pension freedoms, because people can access their entire pension fund from age 55 and so the bankrupt’s whole fund is potentially at risk, according to AJ Bell.

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

They can, however, use an Income Payments Order (IPO) to access any income to which the bankrupt individual becomes ‘entitled’.

The issue over whether or not undrawn pensions can be subject to an IPO has been confused by two conflicting decisions.

In the 2012 case of Raithatha v Williamson, the High Court held that an undrawn pension could be included in an IPO.

It 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. AJ Bell stated this means if someone facing bankruptcy was above the minimum pension age of 55 the court could force them to make an election to draw down on the pension in order to satisfy an IPO.

Then in 2014, the case of Horton v Henry saw the High Court hold that undrawn amounts were not funds to which the bankrupt individual was entitled, and therefore could not be made subject to an IPO.

In this year’s Hinton v Wotherspoon case, the High Court ruled the approach in Horton v Henry was “plainly correct”.

If over the age of 55 and an election to take benefits had not been made, 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.

The Horton v Henry case is currently being appealed. It was heard in May, with the judgment due shortly.

Mike Morrison, head of platform technical at AJ Bell, explained: “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,” he stated.