Proposals to overturn a UK court ruling relating to access to pensions access under the new pensions freedom changes, could see individuals that face bankruptcy forced to hand over their entire pension pots.
According to retirement specialists AJ Bell, a new ruling on the issue as to whether or not undrawn pensions can be subject to an Income Payments Order, is something that could have a devastating affect on any individual facing bankruptcy.
As things stand people facing bankruptcy proceedings may not have to hand over undrawn pension funds after a ruling in the High Court – Hinton v Wotherspoon , found in favour of protecting the unused funds last month.
But with a previous case being reviewed, the implications of the ruling being overturned are, according to AJ Bell, much more pronounced following pension freedoms. Because people can access their entire pension fund from age 55, the bankrupt’s whole fund could now potentially be at risk.
Income Payments Order
Currently a trustee in bankruptcy does not have immediate access to an individual’s pension plan if no income is being drawn. They can, however, us and Income Payments Order (IPO) to access any income that a bankrupt individual becomes entitled to.
The matter had been previously confused by two conflicting legal decisions but were recently clarified by the Hinton v Wotherspoon  case.
In Raithatha v Williamson  the High Court held that an undrawn pension could be included in an IPO. The case also confirmed that any lump sum payments which the bankrupt person could opt for under the pension schemes rules counted as income, not just pension payments.
This means if someone facing bankruptcy was above the minimum pension age (55) the Court could force them to make an election to draw down on the pension in order to satisfy an IPO.
However, in Horton v Henry  the High Court held that undrawn amounts were not funds to which the bankrupt individual was entitled, and therefore could not be made subject to an IPO.
High Court re-stated the approach
In the recent ruling in the Hinton v Wotherspoon  case, the High Court re-stated the approach in Horton v Henry was correct. If over the age of 55 and an election to take benefits had not been made, the mere existence of a drawdown fund is not sufficient to establish an ‘entitlement’ for the purposes of an IPO.
This is because at the point of taking benefits there are still decisions to be made – to take a lump sum, to take a drawdown income, to buy an annuity or to leave the funds untouched.
The case of Horton v Henry is currently being appealed. It was heard in May 2016, with the judgment due shortly, something that AJ Bell’s head of platform technical, Mike Morrison, is concerned about.
“If the Raithatha ruling became a legal precedent or the Horton judgment were reversed, it could cause serious issues for those facing bankruptcy following the introduction of the pension freedoms,” said Morrison.
“When the Raithatha judgment was passed the maximum that could be drawn from a pension fund (so to which an individual became “entitled”) was restricted. After 6 April 2015 this was no longer the case. The whole fund could be taken using the pension freedoms and therefore the whole fund value could have been included in the IPO.
“Horton v Henry made more sense as it restricts the amount that can be included in the IPO, and this latest case also better reflects the original aim of the law.”