There has been a run of conflicting case law concerning the extent to which the trustee in bankruptcy can access a bankrupt's pension pot, but the High Court has recently given some welcome clarification on the position (under English Law).
Until fairly recently, it had generally been assumed that (subject to some exceptions) pensions in respect of which there was no entitlement to payment could not be accessed by a Trustee in Bankruptcy.
However, since 2012 the position has been a little less clear with some case law suggesting that pensions could be vulnerable to claims in bankruptcy.
These concerns increased following the introduction of the freedom and choice flexibilities in relation to accessing defined contribution benefits which make these easier to access. It was thought that a potential outcome of this after April 2015 would be that where an individual had an entitlement to drawdown their entire fund and subsequently become bankrupt they could lose their entire fund to the Trustee in Bankruptcy.
To summarise the landscape and development:
- In 2012 in the case of Raithatha v Williamson, the bankrupt argued that he was not entitled to any payment until he elected to draw his pension and that it was therefore excluded from the bankruptcy estate and the courts could not compel him to draw his pension. The court rejected this argument and the Trustee in Bankruptcy was allowed access to the £1m pension fund.
- In 2014 in the case of Horton v Henry the same court, declined to follow the earlier decision in Raithatha. Although the bankrupt was entitled to draw his pension the court noted that to drawdown his pension he would have to make a number of decisions and elections, and unless and until these were made no entitlement to payment had arisen and the undrawn pension fund did not form part of bankruptcy estate.
Most recently, we have the case of Hinton v Wotherspoon decided by the High Court in May. Aside from some interesting arguments on what income the bankrupt should be left with in order to "meet the reasonable domestic needs" of himself and his family as required under the Insolvency Act, the judge noted that he should follow the decision in Horton v Henry on the basis that this decision is "second in time, it specifically addressed the earlier decision and, with respect, is plainly correct".
To summarise the reasoning in the case and the principles which it appears are becoming established in the English Courts:
- There is a distinction to be drawn between a situation where an amount payable is unknown as opposed to a situation where this is liquidated and therefore certain in value;
- Sums will only fall into the definition of being income where these have been liquidated;
- A bankrupt cannot be considered to be entitled to a payment from their pension scheme where they require to make an election in order to receive this; and
- An election in relation to the pension fund cannot be made by a court.
This most recent decision would appear to offer some clarity against the background of previously conflicting outcomes and offers some guidance on bankruptcy and pensions income in the era of freedom and choice.
If you have any questions or would like more information, please contact a member of our pensions team.