Can bankrupts be forced to drawdown pension so that it will form part of their income for bankruptcy purposes? The Court of Appeal decides

Written on 13 Oct 2016

Speed read

There has been uncertainty as to the position in relation to a bankrupt’s defined contribution (DC) pension benefits for some time, but the Court of Appeal (CA) has now clarified the matter. It has confirmed that where a bankrupt has a right to draw on his personal pension but has chosen not to
exercise that right, he cannot be forced to do so; as a result, the bankrupt’s undrawn pension benefits remain protected through the course of the bankruptcy.

Legal position

Where a bankrupt receives an income during his/her bankruptcy, it is possible for this to be claimed via an ‘income payments order’ (IPO), requiring part or all of the sums to be paid into the bankruptcy estate. The High Court has considered this provision in the context of undrawn
DC pension benefits twice recently, in Horton v Henry, and in Raithatha v Williamson. In both cases the bankrupt had DC pension benefits that they
were entitled to draw but had chosen not to. The trustee in bankruptcy  claimed that the bankrupt should be compelled to draw their benefits so that they could be made subject to an IPO.

In Horton v Henry the High Court held in favour of the bankrupt, but in Raithatha it held that undrawn pension could be subject to an IPO, creating uncertainty about the position.

However, Horton v Henry went to appeal and the CA has now confirmed  that the provisions relating to a bankrupt’s ‘income’ in the Insolvency Act 1986 (IA) cannot be interpreted to extend to a bankrupt’s contractual right to drawn down his pension, either in the form of a lump sum or as income payments. Upholding the High Court’s decision, the CA questioned how a court could exercise a power to force a bankrupt to draw their pension, given questions about the form and nature of the drawdown.

The CA addressed the contrary High Court decision in Raithatha and firmly rejected it, finding that the judge in that case had failed to appreciate the effects of the changes brought about by the Welfare Reform and Pensions Act 1999 (WRPA). The WRPA specifically ensured the protection of pension assets during bankruptcy by providing that they do not vest in the trustee in bankruptcy.  It also amended the IA to allow an IPO to be made during bankruptcy where the bankrupt is in receipt of pension payments, but as set out above, the CA did not consider that this provision could be interpreted as extending to include undrawn pension.

Comment

This decision provides welcome clarity on the protection of undrawn DC pension benefits during bankruptcy proceedings. This is of particular importance given the new DC freedoms which now allow a member to draw the whole of their pension at once as a lump sum (subject to tax) from their normal minimum pension age.