Pension pots – Potential problems for bankrupts

Tuesday 13 January 2015

Over recent years the treatment of a bankrupt’s pension has sparked mass academic debate within the insolvency market, while the Courts have attempted to deal with the issue and interpret multiple conflicting statutes.

In the case of Re X (Application for Income Payments Order) [2014] the Court was tasked with making a decision regarding a bankrupt’s ‘pension pot’.

Notwithstanding the High Court decision in Raithatha v Williamson [2012], where the Court found it had power to compel a bankrupt to allot to draw down on his or her pension for the purposes of an Income Payments Order, District Judge Smith in the Chancery Division of the Manchester District Registry has distinguished that decision and refused to make an Income Payments Order despite the bankrupt’s entitlement to exercise options under a private pension scheme.

The options available to the bankrupt included;

(a) An annual pension and a tax free lump sum, or

(b) An annual pension with a lump sum untouched.

The latter option allowed the bankrupt to receive £5,471.00 per annum in income, which still left the bankrupt with a shortfall in funding her reasonable domestic needs.

The alternative option left the bankrupt with an annual income of £4,103.00 plus a lump sum of £26,971.00, which would be taken by the Applicants via an Income Payments Order.

District Judge Smith refused the Applicants’ application for an Income Payments Order. It was held that the bankrupt’s shortfall in funding her reasonable domestic needs would remain the same, if not increase, in the future. Therefore, the District Judge was unwilling to make an Order to compel the bankrupt to take a lump sum pension payment, which would reduce her annual income below the sum required to subsist.

Furthermore, it was noted within the judgement of District Judge Smith that a decision to compel a bankrupt to elect to take a lump sum from their pension may be inconsistent with the policy of the Welfare Reform and Pensions Act 1999 Act.

Why is this such an important decision?

Despite the debate sparked by this case within the insolvency market due to the conflict with the earlier case of Raithatha v Williamson, the more pertinent issue surrounds the imminent pension reforms due to be implemented in spring 2015.

The reforms brought about by the Finance Bill 2014 allow people over the age of 55 to withdraw 100% of their ‘pension pots’, which clearly leaves many bankrupts (aged 55 or over) in a precarious position until the Courts are able clarify the position.