Pensions Safe in Bankruptcy
Following the high court’s decision back in April 2016, the Court of Appeal has upheld that the access to a Bankrupts pension ahead of payment should be rejected.
When an individual declares themselves Bankrupt and a trustee in Bankruptcy is appointed (TiB) all assets to which the individual is beneficially entitled to, are automatically vested in the TiB. All of these assets form what is called the Bankrupt’s estate. Once appointed, the TiB is to realise all assets that make up the estate and distribute the realisation amongst the Bankrupt’s creditors.
Prior to 2000, all pensions formed part of a Bankrupts estate and would be realised once the bankrupt reached pension age.
For anyone who entered into Bankruptcy after May 2000, all approved pension arrangements were excluded from the Bankrupts estate. However, the Trustee in Bankruptcy could apply for an Income Payments Order (IPO) which would grant the TiB access to any lump sums or pension contributions owed to the Bankrupt during the arrangement.
Horton v Henry – The Case
The recent change to the way pensions are treated in Bankruptcy comes after the Horton v Henry Court of Appeal whereby Mr Henry won the right to exclude his pensions from his Bankruptcy estate based on the fact that he had not yet started benefiting from the pension funds.
Mr Henry was declared Bankrupt back in December 2012, aged 58. At that time, his estate was made up of four pension policies – a Self-Invested Personal Pension (SIPP) and three further personal pension policies.
The trustee in Bankruptcy applied for an IPO to be able to draw monies from the 25% tax free lump sum from the SIPP, 36 monthly contributions from the SIPP in flexible drawdown as well as annuity value of the personal pensions for the next three years. Mr Henry had not yet started to receive the benefits from his pensions but in order to bring these benefits into payment, he would have needed to crystallise all four pension policies.
Mr Henry had previously stated that he did not rely on any of his pensions as a source of income or to help him meet his basic domestic needs. Rather, he wanted to protect as much of his pension for as long as possible with the view to pass on his SIPP to his children when he was ready.
Horton v Henry – The Decision
The Court was then to consider the case for both parties, creditor and debtor, and establish where the line ought to be drawn between “protecting the interests of creditors on the one hand and safeguarding the savings of private pension holders on the other.”
Beverley Budsworth, the MD of The Debt Advisor comments “The decision clarifies the position for individuals already bankrupt plus those contemplating their options. There are alternatives as well to Bankruptcy including Individual Voluntary Arrangements, which tend to exclude undrawn pension benefits from the IVA although pension being drawn will form part of that person’s income when assessing whether they can afford to make contributions to their creditors”.
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