Undrawn pension safe from creditors in the event of bankruptcy, court rules

8th June 2016


People facing bankruptcy proceedings may not have to hand over undrawn pension funds after a recent ruling in the High Court – Hinton v Wotherspoon [2016].

The implications of this ruling are more pronounced following the introduction of the new pension freedoms because people can access their entire pension fund from age 55 and so the bankrupt’s whole fund is potentially at risk.

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 says investment firm AJ Bell.

In Raithatha v Williamson [2012] the High Court held that an undrawn pension could be included in an IPO. The case 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. This means if someone facing bankruptcy was above the minimum pension age (55) the Court could force them to make an election to draw down on the pension in order to satisfy an IPO.

In Horton v Henry [2014] the High Court held that undrawn amounts were not funds to which the bankrupt individual was entitled, and therefore could not be made subject to an IPO.

In the recent ruling in the Hinton v Wotherspoon [2016] case, the High Court states 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 case of Horton v Henry is currently being appealed.  It was heard in May 2016, with the judgment due shortly.

Mike Morrison, head of platform technical at AJ Bell said: “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. After 6 April 2015 this was no longer the case. The whole fund could be taken using the pension freedoms and therefore the whole fund value could have been included in the IPO.

“Horton v Henry made more sense as it restricts the amount that can be included in the IPO, and this latest case also better reflects the original aim of the law.”

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