OpinionNov 1 2016

Sipps - safe from bankruptcy

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Fears that creditors could force someone in bankruptcy to empty their entire pension pot under the new pension freedoms have been allayed.

Earlier this month, the Court of Appeal on Horton v Henry agreed with a ruling by the High Court that an Income Payments Order (IPO) could not be placed on uncrystallised funds.

This gives reassurance that uncrystallised pension funds remain safe from creditors in the event of bankruptcy, making pensions a safer place to save for life after work.

Making excessive pension payments beforehand will not protect those sums from creditors as they can be unwound.

Pension funds themselves have been protected from creditors since the Welfare Reform and Pensions Act 1999, but it is possible for a Trustee in Bankruptcy (TIB) to place an Income Payment Order (IPO) on pension incomes that are already in payment, allowing them to claim income in excess of that needed for ‘reasonable domestic needs’ for up to 3 years. 

The recent court case centred on whether the TIB could force someone to access their benefits so that an Income Payment Order could be lodged against it.

The issue

Mr Henry petitioned for his own bankruptcy. As he was over 55 and therefore entitled to draw on his pension savings, the TIB wished to force the crystallisation under an IPO, potentially giving them access to income and tax free cash from a Sipp and several personal pensions to pay off debts.

Mr Henry did not, however, wish to crystallise his savings. 

The case hinged on whether Mr Henry had a right to pension income. The Courts held that although he had uncrystallised funds and was over the minimum pension age, this did not mean he had become entitled to an income because he was not compelled to take the funds. 

Had the decision gone the other way, there were concerns that the whole of an individual’s pension savings could have been exposed to an IPO.

This is because, under the new pension freedoms, there is no longer a need to buy an annuity and the whole fund can be taken as income and tax free cash in one go.

The decision allays these fears, giving bankrupts a means of supporting themselves in later life. 

A point to note for those who are worried about the potential of becoming bankrupt, making excessive pension payments beforehand will not protect those sums from creditors as they can be unwound. 

Remaining uncertainty?

The position is now clear in respect of uncrystallised pension pots. But there are still some areas of uncertainty.

These include:

Crystallised funds which haven’t yet been drawn. Would an IPO apply to an assumed level of income, such as GAD maximum capped drawdown, or would the whole crystallised fund be exposed?

With regard to defined benefit schemes or occupational money purchase plans, will the deferral of benefits past the scheme’s normal retirement age avoid an IPO on income, or will they still be considered to have a right to income at NRA and therefore forced to take it?

Summary

Pensions are the retirement savings wrapper of choice for many because, pound for pound, they’ll likely provide a better net return. This is due to the tax breaks on offer and the flexibility individuals can enjoy when it comes to taking benefits. 

While protection from bankruptcy is not something at front of mind when making savings choices, it does provide the added comfort that there is every expectation that money saved in a pension can be used for that purpose, even for those who are unfortunate enough to fall on hard times. 

The value of investments can fluctuate and it’s possible they may be worth less than was invested.

Dave Downie is technical manager at Standard Life