In many areas of life it is the same, just when you think you know how something works an event occurs to throw it all back up into the air.
Let’s take pensions and bankruptcy!
Can a trustee in bankruptcy access a bankrupt’s pension funds as part of the bankruptcy process ?
Statute says no. Public policy led to the Welfare Reform and Pensions Act 1999 containing provisions intended to protect approved pension arrangements from claims by trustees in bankruptcy (this includes personal pension plans, retirement annuity contracts and occupational pension schemes). This applied to all bankruptcies after 29th May 2000.
Before this there had been case law.
In Re Landau it was held that in the absence of a forfeiture clause all of a bankrupt’s rights under a personal pension policy vested in the trustee in bankruptcy.
Two more Court of Appeal cases in 2000 (Dennison v Krasner and Lesser v Lawrence) upheld the principle first established in Re Landau that all of a bankrupt’s rights under a personal pension policy vest in the trustee in bankruptcy (Lesser also suggested the ineffectiveness of forfeiture clauses).
Previously the general principle had been that occupational schemes usually contained a forfeiture clause that terminated the bankrupt’s rights under the policy, giving trustee discretion to pay for the benefit of the bankrupt and/or his dependants.
Following the Welfare Reform and Pensions Act 1999 (WRPA 1999), the two circumstances in which a trustee in bankruptcy could access pension plan money were
Under Section 310 of the Insolvency Act 1986 the trustee in bankruptcy is allowed 3 years’ recovery of income of the bankrupt in excess of that needed to meet his and his family’s reasonable domestic needs. In this respect it was anticipated that pensions which had not been crystallised, even if they could have been, were not to be included.
The recent Raithatha v Williamson case has overturned this.
Mr Williamson was aged 58 and had a pension plan which he had chosen not to crystallise. As he was over the age at which benefits were accessible, but Mr Williamson had not drawn his pension benefits, could these be made subject to an income payments order under section 310?
It was argued that the pension entitlements ( a lump sum and/or an annuity) which a bankrupt was entitled to receive, but had not yet elected to receive, constituted a ‘… payment in the nature of income which is from time to time made to him or to which he from time to time becomes entitled …’ within the meaning of Section 310(7), and therefore constituted income by reference to which the Court was entitled to make an income payments order.
On behalf of the bankrupt, it was countered that whilst case law had established that pension income was to be treated as income for the purposes of Section 310 this did not extend to include the rights to elect to draw on that income when the bankrupt did not himself choose to do so. To do so would be to disregard the provisions of WRPA 1999.
The High Court concluded that there was no logical reason why Parliament would have intended there to be a distinction between a bankrupt who had chosen to draw his pension and one who could draw but had not done so and therefore the trustee in bankruptcy could make an appropriate order against Mr Williamson’s pension scheme in respect of both the available lump sum and the pension income.
The case was given leave to appeal and the appeal was due to be heard in November 2012. This did not happen as the case was settled before the appeal and therefore the decision was vacated upon settlement.
An unsatisfactory result in that the legal principles were given no further examination and more importantly the decision of the High Court stands as a precedent which should be followed.
So it appears that for trustees in bankruptcy who are dealing with bankrupt individuals with pension plans there will be no need for the pension to have commenced for it to be under threat.
A couple of things to consider for the future
Money is accessed via an income payments order (IPO) on the income being received after an assessment of the reasonable domestic needs of a bankrupt and such needs are determined by reference to the circumstances of each case.
So where does that leave us – well it would have been good to have a full appeal to have clarified some of the legal issues – but as it stands pensions can be accessed.
I am sure that this will be challenged in a future case and the “public policy” defence argued – that is why we have WRPA 1999 and the overriding need to protect saving in retirement.
[An interesting parallel to this case is provided by the case of Blight and others v Brewster from February 2012. There the Judge ordered that the defendant should be ordered to delegate to the claimants’ solicitor the power to make in the defendant’s name the election to receive the tax-free lump sum from his pension and that this should be used to pay off the debt owed to the claimant. The case also involved a discussion of the difference in treatment of pensions for those declared bankrupt and those who had not chosen to go down this route. A debtor could not have the benefits of bankruptcy without its burdens].
Mike Morrison