The forthcoming reforms to how a personal pension may be flexibly accessed have attracted a great deal of comment.
Less commented on is the effect that bankruptcy may have on personal pensions. As the percentage of new bankruptcy cases where the debtor is aged 55 (when personal pension benefits can be accessed) or older has steadily increased in the past few years, from 15% in 2009 to 19% in 2013, this is a matter of real concern to many.
Whilst the Pensions Minister may be relaxed if people choose to buy a Lamborghini with their pension fund, the sight of a bankrupt driving around in an exotic sports car whilst their creditors nurse losses would stick in the craw of many.
On the other hand, the great majority of pensioners will retire with more modest funds which they will access cautiously to ensure that they last for the remainder of their lives. A £100,000 pension fund will currently offer a 55 year old in good health an inflation linked annuity of just over £2,000 per year (a level annuity will offer substantially more but will not increase with inflation).
So is a personal pension vulnerable to bankruptcy?
Before the Welfare Reform and Pensions Act 1999 changed the law in 2000 by excluding any rights under an approved pension arrangement from a bankrupt’s estate, the answer was “yes”.
That change to the law is not the end of the matter, however. If a bankrupt is entitled to receive income in excess of what is necessary to meet the reasonable domestic needs of himself and his family, the Court may make an income payments order (IPO) requiring him to pay the excess to his trustee in bankruptcy for a maximum of three years.
In the 2012 case of Raithatha v Williamson where the bankrupt had reached the age at which he could access his pension (and notwithstanding that he did not wish to do so at that time), the Court decided that he did have an entitlement to an immediate payment under the pension scheme “merely by asking for payment” so that the Court could make an IPO including the value of what the bankrupt could have obtained from it (in particular the 25% tax free lump sum) had he so asked.
In contrast, in the case of Horton v Henry decided at the end of 2014, the Court disagreed with the decision in Raithatha and held that, in the case of an uncrystallised pension, there was no power for the Court or for the trustee in bankruptcy to compel the bankrupt to take his pension in a particular way.
Until the Court of Appeal decides which of these two conflicting judgments is correct, uncertainty will continue.
Even if Raithatha is ultimately preferred, an IPO cannot be made if its effect would be to reduce the income of the bankrupt below what is necessary for meeting the reasonable domestic needs of the bankrupt and his family.
Over what time-scale are “reasonable domestic needs” to be assessed?
This was the issue before the Court in the 2014 case of Re X where the bankrupt’s personal pension was worth just over £100,000. This would have produced an annual annuity of either £5,474 or £4,103, depending upon whether a 25% tax free lump sum of almost £27,000 was taken.
The bankrupt’s other income comprised state pension and housing benefit resulting in a shortfall of £5,592 in meeting her reasonable domestic needs which the Court inferred would continue, if not increase in the future. The Court therefore declined to compel the bankrupt to take her pension in such a way that would reduce her annual income well below the figure which she required to live on, not just for the 3 year maximum lifespan of an IPO, but indefinitely.
In conclusion, the interaction between personal pensions and bankruptcy is complex, controversial and presently unclear. In each of Raithatha and Horton v Henry the capital value of the pension was approximately £900,000 – no wonder the creditors wanted to get their hands on it to help recoup their losses.
On the other hand Re X shows that even a pension pot of £100,000 will only produce a modest income to assist a person living on the state pension and housing benefit to merely get by; any excessive lifestyle is certainly out of the question.
The one certainty is that this issue will continue to be controversial when flexible access to pensions comes into force in April.
Finally, any bankrupt that is rash enough to blow their pension pot on a Lamborghini will quickly find that their trustee in bankruptcy will claim it as after-acquired property for the benefit of their creditors.
UPDATE: The Trustee in bankruptcy in Horton v Henry is appealing against the judgment of the High Court – this is due to be heard by the Court of Appeal in late January 2016. This should provide clarity as to whether the Trustee can seek an IPO in respect of the uncrystallised pension plans of a bankrupt who is aged 55 or over.
For further information, please contact Neil Harrold, Partner at Hay & Kilner
Call: 0191 232 8345