An overseas property venture he had invested in, using non-pension monies, collapsed recently, resulting in him being declared bankrupt. He wanted to know whether his pension could be used by the trustee in bankruptcy.
Statutory rules on pension vulnerability
Following the Welfare Reform and Pensions Act 1999 (WRPA 1999), there are two circumstances in which a trustee in bankruptcy can access pension plan money.
First, if money was deliberately put into a scheme, knowing that bankruptcy was likely. Second, using Section 310 of the Insolvency Act 1986.
Under this provision, the trustee in bankruptcy is allowed three years’ recovery of income from the bankrupt person, minus what is needed to meet the reasonable domestic needs of the bankrupt and their family.
In this respect, it is anticipated that pensions that had not been crystallised – even if they could have been – should not be included.
Precedent erodes protection
Unfortunately, the decision in the case of Raithatha vs Williamson in the High Court last year could well put a spanner in the works.
The case found that a trustee in bankruptcy could apply for an income payments order not only to income that was being drawn already, but also to undrawn pension an individual bankrupt could be drawing.
The court rejected the argument that income had to consist of periodic or regular payments and concluded there was nothing to prevent a one-off payment or a number of one-off payments at different times from different sources being classed as income for the purpose of an income payments order.
The trustee in bankruptcy could attach an income payments order to up to three years of his income earnings.
Historically, trustees take the tax-free lump sum, opt for drawdown and take one year’s payment, then opt for an annuity and take one year’s payment from that, before handing the annuity back to the bankrupt.
However, since Peter is in flexible drawdown with an undrawn fund of £1 million, this whole amount could be classed as one year’s income. The whole amount could be at risk and Peter could be left with just the £20,000 minimum income requirement.
Mike Morrison
Head of Platform Marketing
AJ Bell