The High Court has determined the circumstances in which sums drawn down under a self-investment personal pension scheme could be subject to an income payments order.

The background

Under Section 11 of the Welfare Reform and Pensions Act 1999 (WRPA 1999), approved pension schemes do not automatically vest in a bankrupt’s trustee in bankruptcy (TiB). An income payments order (IPO) is a mechanism under S.310 of the Insolvency Act 1986 (IA 1986) under which any income which a bankrupt receives during his bankruptcy can be appropriated for the benefit of creditors (subject to the bankrupt being able to meet his reasonable domestic needs).

The WRPA 1999 changed S.310 IA 1986 in order that income under personal and occupation pension schemes were made expressly subject to IPOs. What was unclear from the legislation, however, was whether the right to elect to draw pensions income also vested in a TiB. The case law on the subject has been directly conflicting, represented by Raithatha v Williamson [2012] EWHC 909 (Ch) (which held that the right to elect did vest in a TiB and that an IPO could be made both in respect of pension income and the right to draw a lump sum) and Horton v Henry [2014] EWHC 4209 (Ch) (which ruled that, in respect of undrawn pension income, the right to elect did not vest in a TiB who could not therefore compel a bankrupt to draw pension).

The facts of this case

In the case of Hinton v Wotherspoon, Mr Wothersoon held a SIPP which was subject to a capped drawdown (subject to a maximum cap of circa £36,000 per annum). He used his pension to pay 50 per cent of his annual household expenses (circa £25,000), and had a wife (who had capital but no income) and a step-son who lived at home.

When Mr Wotherspoon became bankrupt, the TiB applied for an IPO against him, and challenged the level of expenditure claimed by him.

The issues

The issues for the court were:

  1. whether a bankrupt could be said to be "entitled" to income from a capped drawdown fund, and if so how much?
  2. how much of the bankrupt’s income should be used to meet his domestic needs and how much should go the TiB under the IPO?

What did the court decide?

The court decided that – in relation to SIPPs, a distinction was to be made between a pension fund where there were elections left to be made in respect of it (and therefore the income level was not liquidated and the bankrupt could not be said to be “entitled” to it) and those where all elections had been made. In the former case, the power to elect did not vest in the TiB and fell outside S.310 IA 1986. In the latter, the bankrupt had become “entitled” to the income (albeit at not more than the capped level under this particular SIPP).

That still left the assessment of what the bankrupt needed for his reasonable domestic needs, however. On this issue the court ruled that the step-son should pay some of the household expenses, with the bankrupt retaining sufficient to pay 38 per cent of the household expenditure, plus his private health insurance and “buffer”. Accordingly he was ordered to pay £1,250 per month to the TiB.

What does this mean for practitioners?

This is a welcome clarification on these issues. Clearly the court preferred the decision in Horton over Raithatha, but has pushed back the point of “entitlement” to a pension to the moment when elections as to what to do with it have been exhausted (rather than at the point of actual receipt). So whilst a bankrupt can preserve his pension pot through absolute inaction, the decision to make elections will (on this decision) crystallise the right to income.