The Court of Appeal’s decision in Horton v Henry has clarified two conflicting lines of case law, holding that an “income payments order” (sought by a trustee in bankruptcy over a bankrupt’s income) cannot extend to an as yet unexercised right to draw a pension. Even where a bankrupt is able to demand immediate payment of an uncrystallised pension, a trustee in bankruptcy cannot compel them to do so and their undrawn pension assets remain “safe” from creditors.
On an individual’s bankruptcy their estate passes to a “trustee in bankruptcy”, who realises their assets and settles their outstanding debts to the extent possible.
Generally, a bankrupt’s estate will not include accrued but undrawn pension rights (whether held under an occupational or personal pension scheme): such uncrystallised rights remain “safe” from their creditors.
A bankrupt’s estate does, however, include any “income”, which can be used to satisfy their debts via an income payments order (“IPO”). Under the relevant legislation (section 310 Insolvency Act 1986), “income” includes “every payment in the nature of income which is from time to time made to [the bankrupt] or to which he from time to time becomes entitled, including… any payment under a pension scheme…”.
Since 2012 there have been a number of conflicting first instance decisions regarding whether a bankrupt’s “income” includes uncrystallised pensions to which he could demand immediate payment:
- In the 2012 case of Raithatha v Williamson, the High Court held that an uncrystallised pension to which a bankrupt could demand immediate payment constituted “income” which could be subject to an IPO and used for the benefit of his creditors. In effect, a trustee in bankruptcy could compel a bankrupt to draw their pension, provided the bankrupt was over age 55 (or over normal retirement age in the case of an occupational pension scheme).
- The High Court reached the opposite conclusion in Horton v Henry (2014). In this case, it was held that a bankrupt is only entitled to receive those pensions which he has elected to draw and where the amounts payable are certain: an uncrystallised pension of uncertain value does not constitute “income” and cannot be included within an IPO used to satisfy a bankrupt’s debts. This decision was refined further by obiter comments in Hinton v Wotherspoon (2016), which held that a bankrupt is not entitled to a pension where he has only made a general decision to enter into drawdown but is yet to make specific elections regarding the application of his fund (ie whether to purchase an annuity, or take a lump sum or monthly pension).
The Court of Appeal upheld the High Court’s decision in Horton v Henry, holding that, for the purposes of the insolvency legislation, a bankrupt’s “income” does not include uncrystallised pension benefits: a trustee in bankruptcy cannot compel a bankrupt to draw a pension (even where he is over the age of 55 and could demand immediate payment), which therefore falls outside the scope of an IPO and remains “safe” from his creditors:
“The contractual right to elect, by service of a notice on the pension provider, to receive a lump sum or income payment, in the pension context is very different in character from any actual payment or the right to receive that actual payment, once the relevant election has been made… payment does not mean a chose in action or a bundle of rights which, if and when exercised, and only when, give rise to the making of payment or the entitlement to a payment.”
The Court of Appeal’s decision appears to reflect the intended statutory balance between the interests of the State (in encouraging people to save for retirement and protecting their pension funds) and those of creditors in bankruptcy. Further, it is aligned to both the 1993 report which initiated the changes to protect pensions on bankruptcy (the Goode Report) and the Insolvency Service’s current guidance for trustees in bankruptcy. It is highly likely, however, that there will be calls for legislative change following the Court of Appeal’s decision: as the High Court pointed out in Raithatha, preserving a distinction based on whether a bankrupt has completed their election process leads to “an anomaly which is difficult to justify”.
Although it might appear that pension funds continue to remain a safe place for bankrupts to shelter their funds, practitioners should note that the Insolvency Act 1986 contains provisions allowing trustees in bankruptcy to apply for the return of “excessive contributions” made to the prejudice of creditors prior to bankruptcy.