Bankrupt cannot be forced to access pension pots to repay debts, Court of Appeal confirms

The High Court dismissed the application of Robert Horton, acting as trustee in bankruptcy (TiB) for Michael Gerard Henry, for an income payments order (IPO) against Henry's pension savings in December 2014. The Court of Appeal has now confirmed that judgment, while at the same time overturning a 2012 decision by the High Court in a similar case.

"This decision can be seen as being consistent with the aim of the 1999 Welfare Reform and Pensions Act (WRPA) – that is, to protect pensions from a bankrupt's creditors," said pensions expert Peter White of Pinsent Masons, the law firm behind Out-Law.com. "Alternatively, it can also be seen as making a rather arbitrary distinction between making an election to draw pension before bankruptcy or during bankruptcy."

The Court of Appeal in this case had to decide whether an undrawn pension could be classed as 'income' for the purposes of an IPO - something which, since April 2015, has become even more significant since it is now possible for individuals reaching the age of 55 to take the whole of their defined contribution (DC) fund as a lump sum, according to White.

"If the TiB could obtain an IPO in respect of the whole of a bankrupt's uncrystallised funds, requiring the bankrupt to draw the whole of his pension as a lump sum, then even relatively small funds which may not have been on the TiB's radar previously would become an attractive prospect," he said.

"However, the Court of Appeal decided that an undrawn pension does not amount to 'income', so a bankrupt cannot be required to elect to take his pension for the purposes of an IPO. There doesn't appear to be much appetite for a further appeal, so it looks like this is the settled position," he said.

Under section 310 of the 1986 Insolvency Act, a TiB can apply for an IPO in order to receive income from the bankrupt's estate for a specified period of time. An IPO can be granted over any income the bankrupt is entitled to receive, including income from a pension scheme. The court can only make an IPO for a precise amount, which would not reduce the bankrupt's own income below what is necessary to meet the 'reasonable domestic needs' of the bankrupt and his family.

In the case in dispute Horton, in his role as TiB, had applied for an IPO against three personal pension policies and a self-invested personal pension (SIPP) held by Henry. None of these pensions were in payment and Henry, although old enough to access each of the pots, did not intend to do so. The SIPP, in particular, held a considerable sum of money that Henry said he intended to pass on to his children.

The High Court judge had briefly examined the law as it stood before 2012 when the same court had ruled that it was possible to force a bankrupt to exercise an option to start receiving a pension that he had not yet touched.

At that time, legal commentators as well as guidance notes from the Insolvency Service and HM Revenue and Customs (HMRC) treated pensions that were in payment and those that had not yet 'crystallised' differently for the purposes of an IPO, according to the judge.

In the Court of Appeal, Lady Justice Gloster agreed.

"The Insolvency Act, and the relevant provisions of the Pensions Act 1995 and the WRPA draw a clear distinction between, on the one hand, rights under a pension scheme and, on the other hand, payments made under such a scheme," she said.

"It would drive a coach and horses through the protection afforded to private pensions and rights thereunder by virtue of section 11 of the WRPA if, by the simple expedient of an application for an IPO, a trustee … could in effect obtain payment of the entirety (or almost the entirety) of a bankrupt's pension fund into the bankrupt's estate so as to meet the claims of his creditors, notwithstanding that the pension was not in payment," she said.

"In my judgment, parliament has decided to draw the balance between, on the one hand, the interests of the state in encouraging people to save through the medium of private pensions (so that in old age or infirmity they will not be a burden on the resources of the state), and, on the other, the interests of creditors in receiving payment of their debts, by the mechanism of [certain provisions of] the Insolvency Act which enable a trustee to claw back excessive pension contributions made by the bankrupt where such contributions have unfairly prejudiced the bankrupt's creditors," she said.

She added that the question of where that line should be drawn was "a matter for parliament" rather than the courts.

White pointed out that the judgment only applied to bankruptcy petitions presented since 19 May 2000, when the relevant provisions of the WRPA came into force.

"In cases where the bankruptcy petition was presented before 29 May 2000 and where the pension vested in the TiB, the situation is different," he said.

"Here, the TiB doesn't need to rely on an IPO to access the bankrupt's pension, so this case has not altered the position. In these cases, the TiB can apply the funds in the same way as the member, and can therefore potentially access the pension freedoms as soon as the ex-bankrupt reaches age 55," he said.