Out-Law News 3 min. read
08 Jan 2015, 11:32 am
Deputy Judge Robert Englehart QC acknowledged that his ruling in a case involving Michael Henry, a bankrupt, would lead to confusion until the Court of Appeal had the opportunity to consider whether his approach or the approach in the earlier case was the correct one. However, his opinion was that the 1986 Insolvency Act did not give the court the power to issue an income payments order (IPO) against a pension that was not already in payment.
Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that pension scheme trustees and savers would "welcome" the decision, even if they would need to wait for an appeal decision in order to know the correct position in law "for certain".
"Legislation is in place to keep pension savings safe from the clutches of a trustee in bankruptcy, expect where the bankrupt member has already started to draw his pension," he said. "The Raithatha case in 2012 suggested, however, that a court could force a bankrupt member to exercise an option to start receiving a pension that he had not yet touched. That would deprive the member of deciding when and in what form to start taking his pension."
"It is common for pension savers to have the right to take some benefits from age 55, potentially bringing those benefits within the reach of a trustee in bankruptcy. And from April 2015, scheme members will have significantly greater freedom to cash out their pension savings. Fortunately, the judge in this case has realised that the Raithatha decision does not tie in with most commentators' understanding of the legislation." he said.
Under section 310 of the 1986 Insolvency Act, a trustee in bankruptcy can apply for an IPO in order to receive income from the bankrupt's estate for a specified period of time. The court can only make an IPO for a precise amount which would reduce the bankrupt's own income below what is necessary to meet the "reasonable domestic needs" of the bankrupt and his family. An IPO can be granted over any income the bankrupt is entitled to receive, including income from a pension scheme.
In the case in dispute the trustee, Robert Horton, had applied for an IPO against three personal pension policies and a self-invested personal pension (SIPP) held by Henry. None of these pensions were in payment, and the amounts that Henry would eventually be entitled to receive from them would not be known until then. The SIPP, in particular, held a considerable sum of money that Henry said he intended to pass on to his children.
The judge briefly examined the law as it stood before the 2012 Raithatha decision, and found that legal commentators as well as guidance notes from the Insolvency Service and HM Revenue and Customs (HMRC) treated pensions that were in payment and those that had not yet "crystallised" differently for the purposes of an IPO. When he gave trustee Situl Devji Raithatha the right to claim against Michael Roy Williamson's uncrystallised pension fund in order to pay creditors in 2012, the judge in that case had been "plainly troubled by what seemed to him to be the anomaly of what he regarded as a technical difference between the position of those who had elected to crystallise a pension before bankruptcy and those who had not done so", Englehart said.
"It seems to me that one possible reason for a distinction could be that an IPO against a pension in payment is relatively straightforward in that the sums payable will be known," he said. "On the other hand, there is no such certainty with an uncrystallised pension which requires various elections before sums certain become payable."
"Mr Henry is not entitled to payment under his pensions 'merely by asking for payment'. There is a considerable variety of options open to him. It would only be after he had made elections that any payment would be due to him. Only then would be become entitled to any payment. I do not consider that there is any power in the court under section 310 or in the trustee to require Mr Henry to elect in any particular way," he said.