John Glover of City Trustees examines the impact of a recent legal case on how a bankrupt individual's pension is treated.
Since the introduction of the Welfare Reform and Pensions Act 1999, the legislation around how a bankrupt individual’s pension is to be treated became clear. If the bankrupt was in receipt of pension income, the trustee in bankruptcy (TIB) could apply for an income payments order (IPO), and if no pension income was being paid, the TIB had no recourse to the pension fund.
Naturally, in true pension style, these rules seemed too straightforward, and when pension rules are simple to understand, we should always expect change. Cue the Raithatha v Williamson 2011 case.
As a brief background, Mr Williamson’s pension fund was in excess of £1m. Raithatha (the TIB) made an application for an IPO in respect of Mr Williamson’s pension commencement lump sum (PCLS) entitlement, along with any income he should be receiving.
You can take my house, but you will never take my pen sion!
As Williamson was 59 years of age, he was allowed to draw a PCLS and income from his personal pension plan. Deputy Judge Livesy QC decided that, in light of the fact he could receive these by merely asking for them, demonstrated that he was ‘entitled’ to this income, and therefore ruled in favour of Raithatha. Until this decision, it was generally understood that undrawn income could not be caught by an IPO.
While this case was due for an appeal, both parties came to a confidential settlement and therefore the original decision still stands as a precedent. Although this is extremely great news for TIBs, the question remains: what next?
The Rathaitha decision was in respect of a personal pension plan and there has been no clarification of whether or not this will apply to occupational pension schemes or whether occupational schemes are still protected under S.91 of the Pensions Act 1995.
For schemes that are trust-based, the provider will normally act as the professional trustee and in the unfortunate event that any client is made bankrupt, they can no longer remain as a trustee of the scheme by virtue of the Trustee Act.
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