New Court Ruling Affects Bankrupts with Pensions

David Davison

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Raithatha v Williamson [2012] EWHC 909 (Ch) (4 April 2012)

In an amendment to the Reform and Pensions Act 1999 (WRPA 1999), the High Court has ruled on the issue of income payments orders (IPO’s) in a decision that will impact upon bankrupts who have a pension and are over the age of 55. Until now an individual yet to draw their pension was protected from an IPO, which may now no longer be the case. As a result of this amendment, trustees in bankruptcy will have a significantly enhanced ability to influence an individual’s pension rights while, equally, individuals in bankruptcy face losing control of their own pension pot.

For this case, the applicant, a bankrupt, opposed an IPO application from the respondent, his trustee in bankruptcy, on the grounds that his undrawn personal pension scheme benefits could not be regarded as income for the purposes of section 310(7) of the Insolvency Act 1986 (“IA 1986”). Having chosen not to draw his pension benefits given that he was still in employment at the age of 59, the applicant argued the case that his pension should not be subject to IPO’s and that the trustee had no right to interfere. The applicant also argued that any future lump sum payment of his accumulated benefits should also not be subject to IPO’s given that legislation only applies to periodical payments of benefits over time.

Both of these arguments were rejected by the Court who ruled that undrawn personal pension scheme benefits as well as lump sum benefits were to be subject to an IPO given that they will be regarded as income for the purposes of s310(7) IA1986. Section 91 of the Pensions Act 1995 continues to protect occupational pensions from this ruling, however, it may now only be a matter of time before trustees in bankruptcy look to further test the limits of section 310 (7) with respect to these schemes. For both the issues now facing occupational pension schemes and the more general issue of increased power for trustees regarding their ability to control individuals’ pensions rights, it could very well be a case of ‘watch this space’ with regard to the knock-on effects.

The ruling itself also appears at odds with WRPA 1999, which had seemingly drawn a line between future pension rights and pensions in payment and, ultimately, a bankrupt’s pension had been considered to be beyond the reach of the bankruptcy trustee as it was not considered income. As of now, this level of protection no longer exists. For those bankrupts over the age of 55, their pension funds can be used to help them to repay their debts, which will have the obvious impact of diminishing their retirement provision.

The lawyer for the bankrupt, Williamson, noted: “The judgment will have a disproportionately adverse impact on more senior citizens who have private pensions whereas younger bankrupts who have not yet reached pensionable age under the scheme will not be subject to such an order depriving them of an element of their pension pot.”

The applicant has been granted time to prepare an appeal against the decision….

David Davison

Post by David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers

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