Savers who become bankrupt but have not yet drawn their pensions will not have to hand them to creditors after a ruling of the Court of Appeal put an end to fears that pension pots were at risk.
The Court of Appeal upheld the High Court’s ruling on Horton v Henry, originally heard in 2014, settling legal difficulties arising from a conflicting judgment of Raithatha v Williamson (2012); and the introduction of the pension freedoms.
In the original Horton v Henry decision, the High Court found that a bankrupt's unexercised rights to draw his personal pension did not represent income to which he was entitled within the meaning of section 310(7) of the Insolvency Act 1986. In the conflicting earlier judgment, of Raithatha v Williamson the High Court had found that bankruptcy trustees could obtain an income payment order (IPO) against any pension that the debtor was eligible to draw.
With the introduction of pension freedoms the Raithatha ruling risked exposing the entire pot of a bankrupt individual who was over age 55. The impact of the new flexibilities is that for defined contribution schemes, there is no longer any distinction between the member’s pension and lump sums (the latter also qualifying as “income”). This means even a relatively small pension fund would be an attractive target for an IPO, if Raithatha had been followed.
The existence of two conflicting High Court decisions, created legal uncertainty which stalled the progress of bankruptcy proceedings. In Horton v Henry, the trustee’s application was solely in respect of income which might become payable to Mr Henry from his personal pension schemes were he to elect to exercise his contractual rights under the pension policies so as to draw down a lump sum and other payments. Crucially, although eligible to do so, he had made no such election so that, as at the date of the application, the pension was not in payment, and he did not intend to make any such election in the foreseeable future. The judge held that, in these circumstances, the court had no jurisdiction to make an IPO.
The clear Court of Appeal decision confirms that individuals who have not yet drawn their pensions will not have to hand them to creditors. Whilst this case could be subject to further appeal to the Supreme Court, this is not thought likely given the general consensus on these issues.