Pensions In Bankruptcy: The Ongoing Impact Of The Cases Of Raithatha And Horton In Light Of The 2014 Budget

In March 2014 the Chancellor announced that from April 2015 individuals of the minimum pensionable age will be able to gain access to the full amount of their pension fund by way of a lump sum payment. This has potentially opened the door to Trustees in Bankruptcy ("Trustee") being able to access the entirety of these funds, extending further the loophole following the decision of Raithatha -v- Williamson [2012] 1 W.L.R. 3559 ("Raithatha"), although now somewhat restricted following Horton -v- Henry [2014] EWHC 4209(ch).

At present individuals of pensionable age can access a 25% tax free lump sum of their fund. Under the government's reforms announced in March 2014, the remainder will also become available to access, albeit subject to income tax.

This raises key questions for both those entering bankruptcy, and Trustees, as to what powers Trustees will have to compel a bankrupt to exercise their option to take their lump sum so that it can be utilised to make payments to creditors. In light of Raithatha and the Trustee's duty to maximise the realisation of a bankrupts assets in order to satisfy their liabilities, it is almost certain that they will seek to compel a bankrupt through the court to access their entire pension fund, although this is now subject to the ruling in Horton -v- Henry (discussed below).

BACKGROUND

The Welfare Reform and Pension Act 1999 states that all approved pension entitlements are excluded from the estate of a bankrupt which may be taken into account and accessed by a Trustee. This is subject to Section 310 of the Insolvency Act 1986 which allows a Trustee to apply for an Income Payments Order, allowing the Trustee to (potentially) gain access to pension funds which had already been accessed by the bankrupt, for example the 25% tax free lump sum which a bankrupt may have elected to take.

Raithatha extended this ability by allowing a Trustee to compel a bankrupt to draw down the 25% tax free lump sum available to him. This was on the basis that the lump sum constituted a "payment in the nature of income" to which the bankrupt was entitled, and so the bankrupt could not simply choose to avoid losing part of his pension, when someone else may have elected to take a lump sum and so be in a much worse situation as a result.

Bankrupts are protected to a certain extent, as when making an Income Payments Order, the court will consider the reasonable needs of the bankrupt and their family. This was demonstrated in the...