Introduction

The Chancellor’s 2014 Budget speech revealed significant  changes to the way in which pension scheme members will be  able to access their savings. This move falls as just one of a raft  of changes to workplace pensions which Steve Webb MP has  described as a “pensions revolution”.

Whilst the introduction of greater flexibility into pension  drawdown has been much welcomed by some commentators,  it is unclear whether the government has considered its  ability to amplify the effects of the recent case of Raithatha v  Williamson [2012] EWHC 909 Ch and further endanger the  safety of the personal pensions of the bankrupt.

Practical issues

The Welfare Reform and Pensions Act 1999 (the “WRPA  1999”) acts to protect the pensions of the bankrupt from the  grasp of Trustees in Bankruptcy (“TIB”). It provides that where  a bankruptcy order is made against a person on a petition  presented after 29 May 2000, any rights of the bankrupt under  an approved pension arrangement are excluded from his estate.

However, this is subject to the limit of any Income Payments  Orders (“IPOs”) which a TIB may obtain under the Insolvency  Act 1986.  An IPO can allow a TIB to claim a bankrupt’s excess  income for a period of up to three years and, under section  310(7) of the Insolvency Act 1986, an IPO can apply to any:

“payment in the nature of income which is from time to time  made to him (the bankrupt) or to which he from time to time  becomes entitled”.

Prior to the decision in Raithatha v Williamson, it was accepted  that an IPO could allow a TIB access to three years’ worth of  a bankrupt’s excess annuity payments but, benefits payable  subject to an election by the bankrupt were outside their scope  and protected.

The court in Raithatha v Williamson surprised insolvency  practitioners by extending the perceived scope of IPOs to  include a personal pension entitlement which a bankrupt was  entitled to receive but which it had not yet elected to receive.  This was not only surprising as it acted in conflict with the  government’s policy of pension protection but, also because  it recreated a division between personal and occupational  pension schemes which the government had previously  legislated to remove.

The case of Blight v Brewster [2012] EWHC 165 (Ch) (which  allowed a judgement debt to be enforced against a lump  sum personal pension entitlement) is thought to ensure the  enforceability of the decision in Raithatha v Williamson by  determining that, whilst a debtor could not be forced to elect to  take their pension entitlement, a court could enable someone  else to take the required election on his behalf.

The Budget

The government’s proposed amendments to the Finance Act  2004 under the Finance Bill 2014 are intended to increase  flexibility into pension drawdown by: „

  • increasing the annual withdrawal cap for pension members  who have opted for capped drawdown;
  • increasing the limits for commutation of a member’s  pension benefits to allow commutation to be more  frequently available; and
  • decreasing the minimum income requirement for flexible  drawdown.

Moreover, these amendments have been expressed to be  merely transitional changes ahead of more radical reforms.  The  Government proposes to introduce a new system  from April  2015 under which all members of defined contribution pension  schemes will able to withdraw their full fund.

Considerations

By removing the limits on the income a person can withdraw  from their pension schemes, the technical difference between a  lump sum and pension income will be blurred.

If Raithatha v Williamson allows TIBs to gain access to  bankrupts’ lump sum entitlements under personal pension  schemes, it remains to be seen how far the courts would  allow TIBs to use the new flexibilities to gain access to a far  larger proportion of a bankrupt’s personal savings than was  previously possible.

Whilst many pensioners will welcome the government’s  proposals, they will no doubt cause concern for those at risk of bankruptcy with personal pensions who may, in some cases,  find that their entire funds are at risk.

In considering whether to apply to court for an IPO, a TIB will  weigh the reasonable needs of the bankrupt against the potential  value of the election available. Given the expected increases in  the lump sum entitlements of pension scheme members, IPO  applications are expected to increase as the lump sums available  upon election rise significantly to dwarf the bankrupt’s reasonable  needs and the associated costs of the application.

Whilst Raithatha v Williamson exposes personal pension  elections to the claws of IPOs, it is not thought to extend to  those occupational pension schemes where the payment  of lump sums on commencement are often subject to the  discretion of the scheme’s trustees.

In the face of increasing IPO applications, the protection on  bankruptcy which may be gleaned from occupational pension  schemes is expected to become a more weighed consideration  for members. Members may be encouraged to rely more  heavily on their occupational pension schemes and, in an effort  to ensure that any IPO is limited, to convert personal pension  scheme funds into annuity income.

Occupational defined contribution pension scheme trustees  will keep their scheme rules under review as the new  legislation develops. A discretion to decide or restrict the  benefits that may be paid could become a valuable protection  for some members.

Similarly, members already contributing to personal pension  schemes may want to consider their governing rules and  whether there are sufficient protections to meet their needs.

Conclusion

At this stage, Raithatha v Williamson remains binding on District  Judges. Whilst the decision aligns with Blight v Brewster, it has  been criticised by commentators for removing the protections  previously afforded to pension scheme savings and for being  prejudiced against bankrupts who have reached the age of  pension entitlement. In the meantime, TIB should remain alive  to any judgements which seek to curtail the use of IPOs against  personal pension entitlements.