Creditors Could Have Access To Bankrupt Individuals' Undrawn Pensions

Many have thought that private pensions are protected from a bankrupt's creditors provided that the bankrupt is not yet receiving his pension (subject to a claim that the contributions were excessive). However, a High Court decision on 4 April 2012 has changed this view. The Court said that creditors may be given rights where bankrupts could have drawn a pension but have not yet done so.

In Raithatha v Williamson [2012] EWHC 909 (Ch), the bankrupt had various pension policies which provided a choice of benefits, including a tax-free lump sum and regular payments. The bankrupt had reached retirement age and so could have received these pension payments, but he had decided to not yet do so. The trustee in bankruptcy applied for an income payments order (an IPO) under Section 310 of the Insolvency Act 1986. In his application, the trustee asked for the IPO to cover the bankrupt's undrawn pension. The bankrupt argued that the Court could not make the IPO.

The Court decided that an IPO could be made in respect of the undrawn pension. Under insolvency law, the Court can make an IPO in relation to a pension "entitlement". The Court said that a bankrupt has an "entitlement" to a pension if he would receive one merely by asking for it. It is not necessary for a bankrupt to have started to receive the pension payments.

The Court considered that the IPO legislation intended this result. The Government was unlikely to have intended to create a difference between bankrupts who had decided to draw their pensions before bankruptcy and those who had not. Such a difference in treatment would be difficult to justify.

The Court also decided that lump sum payments could still be "income" for the purposes of an IPO. It said that payments do not have to be periodical or regular to be "income".

Points for Insolvency Practitioners

This case changes the previous view that an IPO (or a consensual Income Payments Agreement) would only be available in respect of a pension which was already in payment. It...