Pension funds – greater freedom, but at what consequence?

In March 2014 the Chancellor of the Exchequer announced radical changes to the way that individuals can access their defined contribution pension savings at retirement. From April 2015, changes to the tax rules will mean that individuals will be able to drawdown their pension fund in full without the need to purchase an annuity. 

The changes should offer greater freedom and choice for many. However, an unintended consequence of the reforms is that the pension savings of those in financial difficulty may now be vulnerable to demands from Trustees in Bankruptcy. 

Until recently, the established view was that (subject to exceptions) pensions which are not in payment could not be accessed by a Trustee in Bankruptcy.

However, the waters have been muddied with two recent conflicting cases in the English High Court.

In the 2012 case of Raithatha v Williamson, the bankrupt, Mr Williamson, argued that he was not entitled to any payment in the nature of income until he elected to draw it. Until he elected to draw his pension, all he had was a right to make that election. As a result, the pension was excluded from the bankruptcy estate and the courts could not compel him to draw it. However, the court rejected this argument and the Trustee in Bankruptcy was allowed access to Mr Williamson's £1 million pension fund.  The case potentially opened the door to Trustees in Bankruptcy seeking access to an individuals uncrystallised pension fund.  

However, in December 2014 in the case of Horton v Henry  the same court declined to follow the earlier decision in Raithatha. Mr Henry was entitled to draw his pension from his three personal pensions and Self Invested Pension Policy (SIPP), but he chose not to do so. The court, recognising the difference between crystallised and uncrystallised funds, noted that to drawdown his pension, Mr Henry would have to make a number of decisions and elections. Only if, and when, the decisions and elections were made would the pension be crystallised. In the case of Mr Henry, no decision or election had been made and as a result the fund was not crystallised, uncertain in value and no entitlement to payment had arisen. Therefore, the undrawn pension fund did not form part of bankruptcy estate.

The imminent changes to the way individuals can access their defined contribution pension savings at retirement mean that these decisions and elections will increasingly be required to drawdown pension. However, post April 2015 where individuals have elected to drawdown their entire fund and subsequently become bankrupt they could lose their entire fund to the Trustee in Bankruptcy.

However, with Horton v Henry set to be appealed over the coming months we will watch with interest. 

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Register for free Pensions updates

Keep up to date with all the latest legal news, trends and developments within the Pensions sector.

Sign up today

Tim Green

Partner - Head of Pensions

I am a Partner in the Pensions team with a broad advisory, transactional and dispute resolution practice.