Can a Bankrupts’ Personal Pension become an object of an IPO?

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Given that there are currently conflicting authorities on whether an income payments order (IPO) can be made over a bankrupt’s personal pension where the bankrupt is entitled to, but has not opted to, draw the pension, it is fortunate that the High Court decision in Horton v Henry [2014] EWHC 4209 (Ch) (17 December 2014) is now going to be appealed.

In Horton v Henry a trustee in bankruptcy sought an IPO under section 310 of The Insolvency Act 1986 (Act) against a former bankrupt who was entitled to crystallise his self invested pension policy (SIPP) and three personal pension policies. The issue before the court was whether an IPO could be made against these policies.

Despite the same fact pattern, the High Court decided not to follow the earlier controversial judgement given in Raithatha v Williamson [2012] EWHC 909 (Ch). In that case an IPO was granted on the basis that the payments the bankrupt was entitled to receive under his pension scheme, even if in a lump sum, were income within the meaning of the Act. Following the judgement in Raithatha, trustees in bankruptcy have been able to access un-drawn pension rights, bringing any lump sum and annuity into the bankrupt’s estate which could then be claimed for creditors.

However the High Court has held that a bankrupt’s unexercised rights to draw his pension did not represent income to which the bankrupt was entitled and so refused to grant an IPO. The word “entitled” in section 310(7) of the Act suggested a reference to a pension in payment under which definite amounts had become contractually payable. Therefore unless the member triggered the pension payments, they were neither certain nor contractually payable. Further, the judge was of the view that to say that a trustee in bankruptcy could decide how the bundle of contractual rights inherent in a SIPP or personal pension was to be exercised contradicted the evident primary intention of the Welfare Reform and Pensions Act 1999 which was to remove pensions in general from a bankruptcy estate.

The court also found that, as the bankrupt’s pension did not form part of the bankruptcy estate, the trustee in bankruptcy had no power to make any elections in relation to the pensions to bring them into payment.

Fortunately this conflict of authority will shortly be resolved with the Court of Appeal deciding whether Raithatha or Horton is correct.

The appeal is even more significant for pension and insolvency practitioners given the pensions flexibility changes due in April 2015. These changes would mean that a member could access their entire fund as a lump sum and if the appeal were to follow Raithatha, even a small fund could become the object of an IPO.

For further information, help or advice please contact Andrew Cawkwell on 0191 211 7957.