Pensions safe in bankruptcy after Appeal Court decision

Following an Appeal Court ruling on Horton vs Henry, published in October 2016, pensions are once again safe if you go bankrupt. The full judgment is here.

The background to this case was:

• before 2000, pensions formed part of a bankrupt’s estate and would be taken once the bankrupt reached pension age;
• the Welfare Reform and Pensions Act changed this. For people going bankrupt after 2000, any pensions that were not yet being paid were protected;
• in 2012 the judgment in Raithatha vs Williamson  determined that someone who was over pension age could be made to draw their pension if they go bankrupt;
• in 2014 the decision in Horton vs Henry contradicted Raithatha, deciding that the Trustee in Bankruptcy had no power to tell Mr Henry to draw his  pension.

Horton – a clear decision

The Horton case was a very clear judgment for two reasons. First it was a very similar situation to Raithatha.  As the judge said:

 Raithatha was a case which, it seems to me, cannot properly be distinguished from the present case before me.

Secondly there were no nuances in the judge’s decision:

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.

There are no complications here about Mr Henry’s individual circumstances or his “reasonable domestic needs”; this decision should be widely applicable.

Raithatha and Horton were were essentially contradictory decisions so there needed to be a higher court decision as to which was correct. Raithatha was settled out of court, but the Horton case was appealed.

Pension Reform made this more important

Before April 2015, these cases only affected a tiny number of bankrupts, where someone already of pensionable age choose not to draw a pension. And the potential effect was limited to the 25% tax-free lump sum from these pensions plus an increase in the bankrupt’s IPA payments for three years.

But after the Pension Reform changes introduced in April 2015, anyone over 55 can elect to withdraw their entire pension immediately. This is an age at which many people will still be working and have no reason to want to draw their pensions early.

The Raithatha decision would have had wide implications for many people after April 2015.  Over 55s could lose their whole pension, not just the lump sum and 3 years extra payments. This could also have affected people with final salary pensions as after Pension Reform they can transfer those to a defined contribution scheme and access them when 55.

Appeal Court upholds Horton

Nearly two years after the original Horton judgment, we have the answer. The Appeal Court has rejected the Trustee’s appeal, upholding the Horton judgment that only pensions already in payment can be taken into account when setting an IPA. Lady Justice Gloster commented:

I cannot accept the reasoning of Mr Bernard Livesey QC…in Raithatha. It seems to me that he failed to appreciate the effect of the fundamental changes brought about by section 11 of the WRPA with regards to the protection of rights under private pension plans in bankruptcy or the alignment of such protection to that which had previously been afforded to rights under occupational pension schemes.

So, for anyone going bankrupt now, their pensions are protected.

(NB there is a rare exception here, if someone has made excessive contributions eg if you put £40,000 into your pension and then go bankrupt soon after. That always has existed and it hasn’t changed because of these cases.)

If Horton had been overturned, a creditor could make someone with a significant pension policy but no other assets bankrupt and hope to get some money from it. That will not now happen. Debt advisers and probably pensions advisers will be relieved!

What next?

The ruling obviously affects any IPO cases that have been held up because of it, but there aren’t any immediate wider implications. The 2015 Insolvency Service guidelines about how Pensions Reform and bankruptcy followed the Horton decision. As the Appeal court has now upheld this, these guidelines shouldn’t need to be changed. I summarised the implications of these guidelines here: Is your pension affected if you go bankrupt?

But now the big picture is clear, a couple of areas deserve some attention. First, there is a significant divergence between creditor and debtor bankruptcy petitions for people over 55:

• a bankruptcy application by someone with a large defined contribution pension may be rejected because the debtor is not insolvent; but
• if the person is made bankrupt by a creditor petition, the pension assets are protected.

This leaves a group of people for whom bankruptcy is effectively ruled out. Perhaps we may see an increase in single payment or other non-Protocol IVAs where people offer to withdraw some money from their pension?

Secondly, there is the looming issue of annuity sales after April 2017. Post Horton it would seem that the Trustee couldn’t compel someone to sell their annuity – phew! But will the Insolvency Service decide to change its guidelines so that people with a large annuity are determined to not be insolvent because they could sell it? Update – on 18th October 2016, the Treasury announced it was cancelling the plans for annuity sales to be introduced.

At the moment people over 55 divide into three groups: those with private and defined contribution pensions not in payment; those with defined benefit pensions not in payment; and those with a pension in payment. It isn’t obvious to me why from a public policy standpoint the first group should find that bankruptcy isn’t an option for them, but the second and third groups can go bankrupt.

This article was first published in 2014 but has been updated to cover Pension Reform and the result of the Appeal.
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