With changes to pensions coming into effect from April 2015 under which savers over the age of 55 will have greater flexibility to draw down their pensions in lump sums, the question of whether a trustee in bankruptcy can force a bankrupt to draw down his pension so that it can be made available to his creditors is of particular relevance. Unfortunately, this question cannot be answered with any certainty at this time as there are two directly conflicting High Court decisions dealing with this very issue. The Court of Appeal has been asked to consider this question in its review of the High Court decision in Horton v Henry1 which will take place in July 2015.
Horton v Henry: The Facts
Mr Henry was made bankrupt on 18 December 2012. At that time, he was 58 and his assets included four pension policies, including one SIPP.
When an individual becomes bankrupt and a trustee in bankruptcy is appointed, all assets to which he is beneficially entitled vest automatically in the trustee2. It is the trustee’s job to realise the assets of the bankrupt and make a distribution to the bankrupt’s creditors in satisfaction of debts outstanding.
If the bankrupt receives an income during his bankruptcy, his trustee may apply to court for an order compelling the bankrupt to pay some or all of that income to the trustee for distribution to the bankrupt's creditors, providing the bankrupt is left with an income sufficient for meeting the reasonable domestic needs of him and his family. This is called an income payments order (“IPO”)3.
Mr Henry’s trustee in bankruptcy (the “Trustee”) applied for an IPO in respect of the 25% tax free lump sum that would be available from the SIPP, together with the monthly payments from the SIPP and the annuity value of the pensions.
In order for these monies to be drawn down and made available to creditors, the Trustee sought an order requiring Mr Henry to elect to crystallise his pension policies. Mr Henry did not want to do this but rather, wished to preserve his policies for as long as possible with the ultimate aim of passing on his SIPP to his children in the future. In the meantime, Mr Henry’s living expenses were being funded by family and friends.
The Decision in Horton v Henry
The key question for the High Court to decide (and the one that is of interest here) was whether it had the power to make an IPO in respect of a pension not yet in payment.
The High Court had previously dealt with this issue in 2012 in the case of Raithatha v Williamson4 and had concluded that the court could make an order compelling a bankrupt to draw down his pension, so that there was a surplus income on which an IPO could bite. Moreover, the court held that a bankrupt could be compelled to exercise his “bundle of contractual rights” under his pension scheme in accordance with the wishes of his trustee. This decision was controversial and appeared to be at odds with the intention of the Welfare Reform and Pensions Act 1999 (“WRPA”), the effect of which, it was believed, was to remove a pension scheme from the assets available to creditors in a bankruptcy (with certain exceptions).
The judge in Horton was unable to distinguish Raithatha on its facts but nevertheless felt that he was unable to follow that earlier decision. The court in Horton found that the ordinary meaning of the word “payment” in s310 of the Insolvency Act 1986 (which deals with IPOs) was a reference to a pension already in payment.
The judge also noted that there was no obvious provision in s310 which gave the court the power to decide how a bankrupt should exercise his different elections under an uncrystallised SIPP or personal pension, nor could it be said that a trustee in bankruptcy had such power. The judge further noted that to grant a trustee the power to determine how contractual rights should be exercised under such a pension would be inconsistent with the intention behind the WRPA, as set out above.
The Court of Appeal will decide which of the two approaches should be favoured in future. However, until it hears the appeal in July 2015 and hands down its judgment, there will continue to be uncertainty as, until then, there are two conflicting decisions from the same level of judiciary, either of which could, potentially, be followed.
In the meantime, the general consensus is that the decision in Horton is to be preferred. Not only does it appear to be the better reasoned of the two decisions and in line with the intention of the WRPA but the generally held view is that where there are conflicting decisions, the later decision should be treated as correct where, as is the case in Horton, such decision was reached after careful consideration of the earlier case.