Beware the loss of your pension pot.
In the recent insolvency case of Raithatha v. Williamson [2012] EWHC 909 (Ch) Mr Williamson had been adjudicated bankrupt in November 2010. Following his bankruptcy the single most valuable asset held by him was a pension consisting of cash totalling almost £1 million. Mr Williamson was 59 at the time of the Bankruptcy and had chosen not to draw on his pension despite being entitled to do so from 55.
The trustee sought prior to Mr Williamson being discharged from bankruptcy, to issue an application pursuant to Section 310(7) of the Insolvency Act 1986 and use the powers of the Court to make an Income Payments Order in respect of part of Mr Williamson’s pension not withstanding that the pension had not been activated i.e. he had no taken any benefits from it such a stake an annuity or draw a lump sum.
Section 11 of the Welfare Reform and Pensions Act 1999 states that the benefit of an “approved pension arrangement” does not form part of the bankrupt’s estate. The trustee cannot take the entire pension fund. He can only claim against the income which the debtor receives from it.
If the debtor has already started to draw the pension prior to the bankruptcy, the trustee in bankruptcy will be entitled to apply for an income payments order under section 310 in relation to the income received. Under this provision, the court can order the debtor to pay any income in excess of what is needed for the reasonable domestic needs of the debtor and his family.
Section 310(7) provides:
- “that for the purposes of this section the income of the bankrupt comprises every payment in the nature of income which is from time to time made to him or to which he from time to time becomes entitled, including any payment in respect of the carrying on of any business or in respect of any office or employment and (despite anything in section 11 or 12 of the Welfare Reform and Pensions Act 1999) any payment under a pension scheme but excluding any payment to which subsection (8) applies”.
The trustee in bankruptcy therefore issued, prior to the bankrupt’s discharge, an application which raised the question as to whether the bankrupt’s rights and interests or entitlements, whether to the payment of a lump sum and/or an income arising under any pension scheme of which he was a member and whether drawn or activated or not, constituted income by reference or in relation to which the Court was entitled to make an order pursuant to Section 310(7).
The Trustee argued that whilst he had chosen not to draw any benefits he was entitled to do so from 55. He could draw a lump sum of up to 25% or an annuity with the rest or a larger annuity if he didn’t draw a lump sum.
Williamson argued that whilst case law had established that pension income was to be treated as income this did not extend to his rights to elect to draw on that income when he hadn’t chosen to do so.
The judge found for the Trustee.
- “Why should it be that a person who elected on the day preceding his bankruptcy to enjoy the fruits of his pension is liable to be subject to the right of the trustee to apply for it to go to his creditors under section 310 whereas the person who had not yet done so is immune from the impact of the section and can enjoy the full fruits of his pension to the detriment of his creditors?”
Bankrupts need to be careful that pension pots which they thought were safe are not. Trustees will no doubt be reviewing their files to see which funds they can go after on behalf of creditors.
The case however is vulnerable to appeal. This represents a significant improvement in potential returns to creditors.
For advice on Insolvency matters call Carruthers law today or fill in one of our enquiry forms.