insolvency
and pensions
by
Roderick Ramage, solicitor, www.law-office.co.uk
first published by distribution to professional contacts on 31
December 2017
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.
The precedent, because of the
novelty of the subject matter should be treated as experimental
What claims has a creditor on a debtor’s pension? The answer depends largely whether the debtor
is bankrupt.
bankrupt
The general rule is that the bankrupt’s estate vests
automatically in his trustee in bankruptcy under s306 of the Insolvency Act
1986 (IA 1986). “Estate” is defined as
all property belonging to the bankrupt at the commencement of the bankruptcy,
except for items for his personal use in his employment and items for the basic
domestic needs of the bankrupt and his family (IA 1986, s283).
bankruptcy before 29 May 2000
Re Landau [1998] Ch 223 established that the trustee in
bankruptcy (TIB) was entitled to claim the bankrupt’s entire pension benefits
and not just his pension in payment. All
the bankrupt’s rights under the scheme (excluding protected rights) vested in
the TIB and continued to be vested in him even after the bankrupt was
discharged, until all debts were discharged or the fund exhausted.
Welfare Reform and Pensions Act 1999 (WRPA 1999)
Where the bankruptcy order was made on or after 29 May
2000, s11 applies to prevent rights under a registered (then approved) pension
scheme from vesting in the TIB on his appointment. This does not mean that the bankrupt member’s
benefits under the scheme are entirely free from the claims of the TIB, who is
able to claim money paid to the bankrupt under an income payments order (IPO).
“unapproved pension arrangements”
Corresponding protection for the bankrupt’s pension
rights under an unapproved pension arrangement can be provided by an exclusion
order by the court or a qualifying agreement between the bankrupt and the TIB
under s12 of the WRPA 1999 and the Occupational and Personal Pension Schemes
(Bankruptcy) (No. 2) Regulations 2002/836.
The latter (as amended by SI 2006/744) defines these arrangements
to include de-registered pension schemes and employer-financed retirement
benefits schemes (EFRBSs) as defined in Income Tax (Earnings & Pensions)
Act 2003. s393A.
income payment order (IPO)
When a pension becomes payable the TIB may, between the
date of bankruptcy and the date of discharge, apply for an IPO under IA 1986, s310,
of which sub-s(7) states 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 guaranteed minimum pensions and protected rights. “Any payment” includes lump sums arising on a
member’s death in service and from the commutation of pension as well as the
pension itself.
As an alternative to an income payment order, from 1
April 2002 the IA 1986, s310A (inserted by the Enterprise Act 2001, s260)
provides for an “income payment agreement” to be made between the bankrupt and
the TIB.
the Raithatha decision overruled
The
main finding in Raithatha v Williamson [2012] EWHC 909 (Ch) was that an IPO could
be made against benefits, to which the bankrupt is entitled but has not
exercised his right to draw from the scheme, including both pension payments
for the duration of the IPO and the tax-free lump sum of up to 25% of the value
of the bankrupt’s pension fund. The
Court of Appeal reversed this decision in Horton v Henry [2016] EWCA Civ 989,
with the effect now that only pensions in payment at the start of the
bankruptcy or that the bankrupt voluntarily draws down are available to the
creditors.
not bankrupt
The creditor is in a much more favourable position, if
his debtor is not bankrupt than if he is.
In Blight v Brewster [2012] EWHC 165 (Ch) the defendant debtor was a
member of a pension scheme, under which he could elect to draw down 25% of his
pension fund. The creditor obtained a
third-party debt order in relation to the debtor’s right. There is no debt until the election is exercised. The court used its injunctive power under the
Senior Courts Act 1981 s37 to order the defendant to delegate to the claimant
his power to elect to take his tax free 25% lump sum up to the amount needed to
pay the balance of the judgment debt.
other issues
flexible
drawdown
The Taxation of Pensions Act 2014 enabled registered
money purchase pension schemes, whether occupational or personal, to allow
members aged 55 and over to draw down the whole of their pension funds from 6
April 2015. The first 25% of amounts
drawn down is (as previously) tax free and the balance is taxed as income. The ability to draw down the whole of a
member’s fund would, if Raithatha had not been overruled, have had profound
repercussions on bankrupt members of money purchase pension schemes, and can be
expected to have such repercussions on debtors who are not bankrupt. So far as registered money purchase schemes
are concerned, bankruptcy is now an even greater privilege than it was
previously.
access to pension scheme assets
The creditor’s entitlement is in respect of the debtor’s
rights as a pension scheme member and not in respect of the assets that the
scheme holds to fund the benefits provided by the pension scheme. See Granada Group Limited v The Law Debenture
Pension Trust Corporation plc [2015]
EWHC 1499 Ch at 53 to 55: in which 55 ends with the following. “… the
employee received a present right to a future benefit. That does not mean that he
has a proprietary interest in the assets of the trust. He did not.”
forfeiture and alienation of benefits
All clauses for forfeiture on bankruptcy of pension
rights in a registered pension scheme are ineffective (WRPA 1999, s 14). By s91(1) of the Pension Act, assignments,
commutations, surrenders, charges, liens and set-offs of a member’s rights are
ineffective and agreements for them are unenforceable, and, by s92(2) may
result forfeiture, following which, by sub-s(3) the trustees may pay the
benefits to all or any of the member and his dependants. The only orders over a member’s rights that a
court may make in favour of a creditor are an attachment of earnings order and
an IPO: the injunctive relief in Blight v Brewster above is not an act made
ineffective by s91(1). There are no “s91”
restrictions on personal pension schemes and EFRBSs.
excessive contributions
IA
1986, sections 342A to 342C, inserted by inserted by WRPA
1999, s15.
On the TIB’s
request for an excessive pension contributions order, the court must consider, whether any pension
contributions by or for the bankrupt were made for the purpose of putting
assets beyond the reach of his creditors and whether the total amount of any
contributions is excessive in view of his circumstances when paid. The court may make an order to restore the
position to what it would have been had the excessive contributions not been
made.
END
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