by Roderick Ramage, solicitor, www

the creditor and the bankrupt’s pension (41)

by Roderick Ramage, solicitor, www.law-office.co.uk

first published in New Law Journal on 14 September 2012

revised on 20 November 2016

DISCLAIMER

This article is not advice to any person and may not be taken as a definitive statement of the law in general or in any particular case. The author does not accept any responsibility for anything that any person does or does not do as a result of reading it.

A (as revised on 20 November 2016)

preliminary

The recent legal history of pensions and bankruptcy is as follows.

2012 Raithatha v Williamson

High Court. See below and article 39 on my website. Under this decision the trustee in bankruptcy could obtain for the creditors, if the bankrupt had reached age 55, the tax free lump sum equal to 25% of his pension fund and the maximum drawdown pension that he could take.

2014 budget

The Chancellor’s budget speech on 19 March 2014 included an announcement that members of DB scheme would be entitled to access the whole of their pension funds from April 215

2014 Re X (Application for Income Payment Order)

The District judge described the Raithatha decision as “controversial”.

2014 Horton v Henry

High Court (judgment December 2014). The opposite conclusion was reached in this case, so the trustee in bankruptcy was not able to enforce a drawdown of the bankrupt’s pension fund.

2015 flexible drawdown

From 6 April 2014 members of DB pension scheme may, subject to the scheme’s provision and to tax, draw-down the whole of the pension fund. If Raithatha still applied, the whole of the bankrupt’s pension fund would have been available to creditors.

2016 Hinton v Wotherspoon

High Court. Followed Horton v Henry

2016 Horton v Henry appeal

The Court of Appeal dismissed the appeal against the High Court decision, so the law is effectively what it was before Raithatha.

key point

Pensions remain protected from the claims of a bankrupt’s creditors as and to the extent that they were before the Raithatha decision. In other words any payments, except GMPs, that the bankrupt receives from a pension scheme may be the subject of an income payment order, and the member cannot be required to elect to draw pension. The protection of pension schemes applies only to registered pension schemes.

background

1 When an individual becomes bankrupt his estate automatically vests in his trustee in bankruptcy (TIB) under s306 of the Insolvency Act 1986 (IA 1986). “Estate” is defined for these purposes as all property belonging to or vested in the bankrupt at the commencement of the bankruptcy, except for items for the bankrupt’s personal use in his employment and items for the basic domestic needs of the bankrupt and his family (s283 IA 1986).

2 Where the bankruptcy order was made before 29 May 2000, it was established in Re Landau [1998] Ch 223 that the TIB was entitled to claim the entire pension benefits of the scheme member, not just pensions in payment. All the member’s rights under the policy excluding protected rights (rights contracted-out of the State Second Pension) vested in the TIB and continued to be vested in him even after the bankrupt was himself discharged, enabling the TIB to claim entitlement to them until all debts were discharged.

3 In an effort to protect their members, many pension schemes introduced clauses to forfeit a member’s entitlement to benefits automatically upon bankruptcy and to bring into operation protective trusts, under which the trustees had a discretion to make payments up to the value of those benefits to a particular class of beneficiaries, usually comprising the member and his family.

Welfare Reform and Pensions Act 1999

4 The WRPA changed the law in two stages.

(a) 29 May 2000. Section 11(1).

“Where a bankruptcy order is made against a person on a petition presented after the coming into force of this section, any rights of his under an approved pension arrangement are excluded from his estate.”

(b) 5 April 2002. Section 14(3).

“In section 92(2) of the Pensions Act 1995 (exceptions to the rule preventing forfeiture of rights under occupational pension schemes), paragraph (b) (which allows forfeiture of such rights by reference to a scheme member's bankruptcy) shall cease to have effect.”

5 This does not mean that the bankrupt’s benefits under a pension scheme are entirely free from the claims of the TIB. The TIB has no claim to the underlying pension scheme assets but is able to claim money paid to the bankrupt.

6 The TIB may to apply, between the date of bankruptcy and the date of discharge, for an income payments order (IPO) under s310 IA 1986, of which ss(7) states expressly that such an order may be made in respect of every payment in the nature of income including any payment under a pension scheme apart from GMPs and protected rights. “Any payment” includes lump sums arising from the commutation of pension as well as the pension itself.

7 The consequence of these provisions are as follows.

(a) from 29 May 2000 to 5 April 2002 no forfeiture clause

Member’s benefits did not vest in the TIB but were payable to him from the scheme.

(b) from 29 May 2000 to 5 April 2002 valid forfeiture clause

Member’s benefits forfeited and may be payable under protective trusts.

Member’s benefits do not vest in the TIB but are payable to him from the scheme, and all forfeiture clauses are void.

8 Section 11 of the WRPA applies to registered schemes, which includes personal and occupational, and s14 of that Act inserted s159A into the Pension Schemes Act 1993 (no forfeiture on bankruptcy of rights under personal pension schemes).

Raithatha v Williamson [2012] EWHC 909 Ch

9 The decision in this case was handed down on 4 April 2012. Until this decision, it had been generally assumed that an IPO could be made in respect of only money actually payable from a pension scheme. The TIB’s argument, which was accepted by the court, was that Mr Williamson, who was aged 58 and entitled to start his pension but was still in work and had not exercised his right to do so, was nevertheless entitled to a tax free lump sum and a pension, and that an IPO could be made in respect of them. The effect of this decision was that a bankrupt was no longer be able keep his pension safe from the grasp of the TIB by deferring the start of payment until after his discharge.

10 The decision was not universally accepted as sound (see the two 2014 decision in preliminary note above), the uncertainty has now been resolved by the Court of Appeal. The finding in Raithatha v Williamson applies to both occupational and personal pension schemes: s11 of the WRPA applies to registered schemes, which includes personal and occupational, and s14 of that Act inserted s159A into the Pension Schemes Act 1993 (no forfeiture on bankruptcy of rights under personal pension schemes).

Horton v Henry [2016] EWCA Civ 989

11 The Court of Appeal held that Raithatha was wrongly decided. The bankrupt had no duty to comply with his TIB’s request to draw down his pension, and he right to draw down a pension is not “a payment in the nature of income” against which an IPO can be made

END

B (as originally published in New Law Journal 14 September 2012)

creditors’ claims on a bankrupt’s pension

Roderick Ramage describes a radical shift in the law made by the recent decision in Raithatha v Williamson, which increases the opportunity for creditors to claim against a bankrupt’s pension

key point

The trustee in bankruptcy may now seek an income payment order in respect of not only pensions and other benefits in payment but the bankrupt’s entitlements, even though he has not started to draw them.

background

12 When an individual becomes bankrupt his estate automatically vests in his trustee in bankruptcy (TIB) under s306 of the Insolvency Act 1986 (IA 1986). “Estate” is defined for these purposes as all property belonging to or vested in the bankrupt at the commencement of the bankruptcy, except for items for the bankrupt’s personal use in his employment and items for the basic domestic needs of the bankrupt and his family (s283 IA 1986).

13 Where the bankruptcy order was made before 29 May 2000, it was established in Re Landau [1998] Ch 223 that the TIB was entitled to claim the entire pension benefits of the scheme member, not just pensions in payment. All the member’s rights under the policy excluding protected rights (rights contracted-out of the State Second Pension) vested in the TIB and continued to be vested in him even after the bankrupt was himself discharged, enabling the TIB to claim entitlement to them until all debts were discharged.

14 In an effort to protect their members, many pension schemes introduced clauses to forfeit a member’s entitlement to benefits automatically upon bankruptcy and to bring into operation protective trusts, under which the trustees had a discretion to make payments up to the value of those benefits to a particular class of beneficiaries, usually comprising the member and his family.

Welfare Reform and Pensions Act 1999

15 The WRPA changed the law in two stages.

(a) 29 May 2000. Section 11(1).

(b) 5 April 2002. Section 14(3).

16 This does not mean that the bankrupt’s benefits under a pension scheme are entirely free from the claims of the TIB. The TIB has no claim to the underlying pension scheme assets but is able to claim money paid to the bankrupt.

17 The TIB may to apply, between the date of bankruptcy and the date of discharge, for an income payments order (IPO) under s310 IA 1986, of which ss(7) states expressly that such an order may be made in respect of every payment in the nature of income including any payment under a pension scheme apart from GMPs and protected rights. “Any payment” includes lump sums arising from the commutation of pension as well as the pension itself.

18 The consequence of these provisions are as follows.

(a) from 29 May 2000 to 5 April 2002 no forfeiture clause

Member’s benefits did not vest in the TIB but were payable to him from the scheme.

(b) from 29 May 2000 to 5 April 2002 valid forfeiture clause

Member’s benefits forfeited and may be payable under protective trusts.

Member’s benefits do not vest in the TIB but are payable to him from the scheme, and all forfeiture clauses are void.

Raithatha v Williamson [2012] EWHC 909 Ch

19 The decision in this case was handed down on 4 April 2012. Until this decision, it had been generally assumed that an IPO could be made in respect of only money actually payable from a pension scheme. The TIB’s argument, which was accepted by the court, was that Mr Williamson, who was aged 58 and entitled to start his pension but was still in work and had not exercised his right to do so, was nevertheless entitled to a tax free lump sum and a pension, and that an IPO could be made in respect of them. If this decision is upheld on appeal, expected to be heard before the end of this year, a bankrupt will no longer be able keep his pension safe from the grasp of the TIB by deferring the start of payment until after his discharge.

20 The TIB had obtained an injunction to prevent Mr Williamson from taking any steps to draw his pension, because now, contrary to the former practice of deferring the pension, a sensible defensive step by a bankrupt is to start drawdown or an annuity but with no lump sum payment. The maximum recovery for the TIB would be the bankrupt’s tax-free lump sum (25% of the fund) and the highest drawdown that is permissible for the duration of the IPO, but a well advised bankrupt will try to take the wind out of the TIB’s sails by crystalizing his entitlement, but at as low a rate as he can, and not to exercise his right to commute part of it for a tax free lump sum.

personal pension schemes

21 The finding in Raithatha v Williamson applies to both occupational and personal pension schemes: s11 of the WRPA applies to registered schemes, which includes personal and occupational, and s14 of that Act inserted s159A into the Pension Schemes Act 1993 (no forfeiture on bankruptcy of rights under personal pension schemes).

defensive steps?

22 Forfeiture on bankruptcy remains prohibited, but, as a possible step to protect members, scheme might provide that bankruptcy automatically triggers a benefit commencement event, under which a member’s pension would start and no lump sum would be paid. The pension would be subject to an IPO, but the cost to the bankrupt will be less than suffering the loss of 25% of the fund and pension under an IPO.

END

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