Protecting a bankrupt's pension: Horton v Henry, Court of Appeal 7/10/2016
Good news for debtors but disappointing for creditors: the Court of Appeal has decided, in its recent Horton v Henry decision, that a bankrupt individual's pension rights cannot be exercised by his trustee in bankruptcy.
Bankruptcy and pensions
Under the Welfare Reform and Pensions Act 1999 (WRPA 1999), a bankrupt's pension rights in a registered pension scheme are treated differently to most other assets in that they do not vest in a trustee in bankruptcy. This means that a trustee in bankruptcy cannot automatically access a bankrupt's pension fund.
However, where a pension is in payment, trustees in bankruptcy can apply to court for an income payments order (IPO) to bring the bankrupt's pension income (or part of it) for a set period of time into the bankruptcy estate. The funds can then be distributed to creditors.
An IPO can only apply to 'income' (as defined in the Insolvency Act 1986 (IA 1986). Given that a pension pot may be one of an individual's most valuable assets, it is perhaps not surprising that trustees in bankruptcy have asked the court to agree that a pension pot which is not already drawn-down, but where the individual has the right to draw down, is 'income' and therefore can be subject to an IPO.
There have been several recent cases grappling with this issue. The topic has become particularly high profile since the introduction of new pension flexibilities in April 2015, as individuals can now (subject to scheme rules and tax as appropriate) take up to 100% of their money purchase pension pot as a lump sum after age 55 – an attractive prospect for a trustee in bankruptcy looking to draw on as many assets as possible.
Previous High Court decisions
In 2012, the High Court in Raithatha did agree that an IPO could be granted so as in effect to require a bankrupt to draw down 25% of his pension pot (the maximum amount possible at the time). The Court decided that unexercised rights to draw a pension did represent income for the purposes of the IA 1986.
The Raithatha case was widely criticised, particularly after the introduction of the new pensions flexibilities mentioned above. It seemed possible following the Raithatha principles to force bankrupts to draw down the entirety of their pension pots, leaving them with nothing in retirement.
Later, relying on Raithatha, a trustee in bankruptcy (Mr Horton) approached the High Court requesting an IPO to require a bankrupt (Mr Henry) to take his four valuable money-purchase pension pots (not yet in payment) as lump sums. The Deputy Judge disagreed with Raithatha which he thought represented an incorrect interpretation of the WRPA 1999 and refused to grant Mr Horton the IPO.
Horton v Henry in the Court of Appeal
The Court of Appeal in October this year upheld the High Court's decision in Horton v Henry, confirming that a trustee in bankruptcy cannot require a bankrupt to elect to exercise pension rights. This decision was based on the Government policy behind the WRPA 1999 itself, namely to protect pension savings in order to prevent bankrupt individuals being forced to rely on the State in retirement. The Court of Appeal also took into account that individuals now have huge flexibilities in relation to money-purchase pensions. It was not thought appropriate for the Court to let trustees in bankruptcy dictate how a pension pot is to be used.
The Court of Appeal decision will be reassuring for debtors, who may consider leaving their pension pot untouched whilst they have other sources of income (particularly given the favourable inheritance tax position in many cases enabling money purchase pension pots to be passed to the next generation free of inheritance tax). Provisions in the IA 1986 which enable a trustee in bankruptcy to challenge an individual's 'excessive' pension contributions in certain circumstances will help to prevent this safeguard being abused – a small comfort for creditors.