Posted 18 December 2015 By Steve Elliott, Business Recovery and Insolvency Partner
In Business Recovery & InsolvencyComments 1
Prior to May 2000 a bankrupt's personal pension vested in, and could be claimed by, their Trustee in Bankruptcy.
However, that all changed following the introduction of the Welfare Reform & Pensions Act 1999 (‘WRP 99’), with the result that a Trustee was limited to challenging excessive contributions remitted to the pension in an attempt to put assets out of the reach of creditors.
In my view, as an Insolvency Practitioner who had the misfortune of applying the previous law and taking policies from many everyday consumers, the status quo had been achieved. I certainly welcomed the move away from the punitive and long lasting effects of the old rules.
Back to the Future?
Some twelve years later and the much publicised 2012 case of Raithatha v Williamson appeared to blot the landscape yet again, when the Court held that an entitlement to elect to draw a lump sum fell within the definition of "pension income" for the purposes of an Income Payments Order (‘IPO’) under Section 310 of the Insolvency Act 1986.
As the bankrupt was of retirement age under the terms of his policy, the judgment enabled the Trustee to compel him to take his benefits, and claim a 25% tax free lump sum and three year’s worth of annuities.
Although the bankrupt initially appealed the decision, the matter was settled in 2013 before the appeal was heard. Admittedly, the amounts involved were particularly significant, with a pension fund value approaching £1 million, but that has, nonetheless, left an uncomfortable precedent for Insolvency Practitioners. Applying that means we once again have an obligation to consider whether bankrupts should be forced to cash in their pension policies.
2014 Budget - "Lamborghini Pensions"
To further complicate matters, the Government has unveiled plans to abolish the 25% lump sum limit and instead, a pensioner will be permitted, if they so wish, to draw down the entirety of their pension once they reach pensionable age. This led to the Pensions Minister Steve Webb MP to say:
"If people do buy a Lamborghini but know that they'll end up just living on the state pension that becomes their choice."
In the context of bankruptcy, the sums that a Trustee may be seeking to claim will be significantly higher and the obligation will arguably be heightened, notwithstanding the tax implications that may bring.
Common Sense Prevails…For Now?
The April 2014 case of Re: X (BPIR 1081) has not been as widely reported but brings the matter full circle, back to what was intended in WRP 99 and the changes in 2000. The amounts involved may not have been of the magnitude seen in Raithatha v Williamson, but the approach adopted by the District Judge is, in my view, the right one.
The debtor in the case was adjudged bankrupt in January 2013 and their discharge was suspended following an application from joint Trustees in Bankruptcy seeking an IPO in respect of pension benefits.
Her reasonable domestic needs were assessed by court at £1,350 per month and that left her with a shortfall of £466 per month, or £5,592 per annum.
The Trustee wanted to exercise pension options that would have provided an annuity of £4,100 and tax free lump sum of £26,971, and was seeking the whole of the latter as the basis for the IPO. However, if the tax free lump sum was not taken, then the full pension at £5,472 would not provide an annual surplus income.
In rejecting the IPO application, the District Judge concluded that it would not be right to compel a bankrupt to exercise an option that would reduce annual income below their domestic needs. Those reasonable needs must be considered over a period longer than the three years ordinarily available under the IPO, as the nature of pension is to provide long term benefit into retirement. To do otherwise, would be to their long term detriment and militate against the public policy set out in the WRP 99.
It is not presently known if or how Parliament will address this issue. A consultation closed on 11th June 2014, and no doubt further developments will transpire before the Finance Bill receives Royal Assent.
Until then, both bankrupts and Insolvency Practitioners alike face uncertain times.
To discuss this or anything else contact me on 01793 818300