Let's party like it's 1999ish

The last four years have seen much discussion over the extent to which bankruptcy puts the pensions of some individuals at risk.

Debate has focussed on two cases which have gone before the High Court during that period.

The first of the cases, Raithatha vs Williamson, was heard in April 2012. In this case the Court held that pensions which had not been crystallised could be subject to an Income Payments Order, potentially forcing those aged 55 or over to take benefits whether they want to or not because they are deemed ‘entitled’ to them. The Court also confirmed that if the bankrupt had a right to lump sum payments, these could also be treated as income, meaning the bankrupt may be forced to draw on their tax-free cash.

In reaching this decision the Deputy Judge considered the question of whether an express election to receive income was needed to create an entitlement. Whilst he considered as attractive the argument that an election was required, he then looked at what he held to be the intent of the legislation and concluded that the entitlement was created regardless of an election. He did not feel comfortable that legislation could have been intended to create a position where an individual who elected to take benefits the day before they were made bankrupt could be subject to an Income Payments Order, but a person who had not elected to do so was protected.

This departed significantly from the position that had been held as established for pensions since the Welfare Reform and Pensions Act 1999 (WRPA99). Other than in limited circumstances, the WRPA99 had offered protection from claims against pension funds in relation to all bankruptcies since 29 May 2000.

Leave to appeal the Raithatha decision was given, but in December 2012 the appeal was settled, meaning the Court’s original decision was left to act as a precedent.

The second significant case, Horton vs Henry, was heard in December 2014. The Judge in this case considered the Raithatha decision, but in spite of the precedent it may have set, decided there was no entitlement to undrawn funds in a pension, meaning that these funds could not be caught under an Income Payments Order. The same principle also applied to lump sum rights.

In this case the Judge held that it was not easy to reconcile the trustee in bankruptcy being in a position to decide how the “bundle of contractual rights inherent in a SIPP or personal pension are to be exercised ... with the evident primary intention of the Welfare Reform and Pensions Act 1999 to remove pensions in general from a bankruptcy estate”. Strong stuff.

The Horton case has also been appealed and pension and bankruptcy professionals had been awaiting the decision of the Court with some anticipation to see whether the Raithatha decision or the initial Horton decision would be followed.

However, whilst we continue to wait for the ruling, a third High Court decision has found in favour of the Horton v Henry case. In Hinton vs Wotherspoon the Judge found the decision in Horton vs Henry to be “plainly correct”. The judge decided that, because decisions still needed to be made before benefits could be taken, for example whether to take a lump sum to a drawdown income, no entitlement to the uncrystallised funds had been established, meaning they were not at risk of being caught under an Income Payments Order.

Two interesting questions arise from the Hinton vs Wotherspoon decision:

  • How far can it be relied on when considering future bankruptcy cases?

  • In a post-pension freedoms world where individuals are less likely to use their pensions to provide a steady income, does the treatment of pension funds and bankruptcy itself need to be re-considered?

In both Horton vs Henry and Hinton vs Wotherspoon the decision was based at least in part on entitlement not being established because of the “bundle of contractual rights” held by the respondent under their pension. It was not felt proper that the trustee in bankruptcy should have the right to decide how these contractual rights were used.

Going forwards, the bundle of contractual rights under most pension schemes is only likely to increase in size. When the decisions were reached the right to choose between drawdown and annuity already existed in many schemes, as well as the right to leave the pension untouched. Equally, many scheme members will have held the right to decide whether or not to take a lump sum.

Now, scheme members have a variety of options in relation to how they take uncrystallised funds pension lump sums, as well as a wider choice of annuities.

The argument that a bankrupt has established an entitlement to any one of this wider range of retirement options must be weaker. However, in a world where this wide range of retirement options is available, the argument that the bankruptcy laws no longer adequately cope with them may grow.

Head of Technical Resources

Gareth joined AJ Bell in April 1997 and, as the company’s first SIPP administrator, helped to establish what is now the Platinum SIPP. In 2000 he became the first member of the administration team for the newly launched Sippdeal SIPP (now AJ Bell Youinvest) and in 2006 set up AJ Bell’s technical team. Gareth is responsible for analysing regulatory and technical material and communicating this within AJ Bell and to the wider world through a variety of media.