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Is your pension available to creditors?

The English High Court has ruled that a trustee in bankruptcy should not be permitted to have access to a bankrupt person’s pension scheme savings to discharge debts before the pension becomes payable.

The Court has ruled that the Insolvency Act 1986 does not give the Court the ability to issue an “Income Protection Order” (“IPO”) against a pension for which payments had not yet begun. This ruling was out of line with an earlier decision, so the issue may not be regarded as settlement until it is considered by the Court of Appeal.

Pension providers will most likely believe the decision was the correct one to make in the circumstances. The general effect of the legislation is to protect pension money from a trustee in bankruptcy unless the person has already started to receive payments under his or her pension. A 2012 case indicated that a Court could compel a bankrupt member of a pension scheme to exercise an option to begin to be paid a pension not yet accessed. There has been a certain amount of disapproval of this earlier decision.

It is commonplace for savers to have the right to take some benefits from age 55. As a consequence, the trustee in bankruptcy may, potentially, have access to this money. Further, from April this year, scheme participants will have significantly greater freedom to “cash out” their pension.

Under the relevant provision of the legislation, a trustee in bankruptcy may apply to the Court for an IPO to receive income from the bankrupt’s estate for a particular period of time. A Court may make an IPO in respect of any income a bankrupt is entitled to receive, including pension payments.

In the case at hand, the trustee had applied to the Court for an IPO against various pension policies held by the bankrupt. None of them were payable. One had a large sum of money.

In its decision the Court noted that before the earlier decision, HMRC and other government bodies treated pensions that were in payment, and those that were not yet in payment, differently. He attributed this to the fact that once a pension is in payment, the sums payable will be known, whereas before a pension is in payment, the sums to be paid are uncertain. It also can involve a number of elections on the part of the pension holder.

The Court stated:

Mr Henry is not entitled to payment under his pensions 'merely by asking for payment'. There is a considerable variety of options open to him. It would only be after he had made elections that any payment would be due to him. Only then would he become entitled to any payment. I do not consider that there is any power in the court under section 310 or in the trustee to require Mr Henry to elect in any particular way.

In effect then, the bankrupt’s pension was not “brought forward” to make it available to creditors. Until the Court of Appeal determines the issue, there will be uncertainty about whether this reflects the correct position at law.


Mr. San Chima
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