George, 59, was thinking about retiring in the next few months and wanted to do a quick check on some issues.
However, George had filed for bankruptcy six months ago. His leisure business got into trouble, but since most of his money was in a Sipp, he assumed it would not be touched by bankruptcy.
Unfortunately, it might not be as simple as that. A trustee in bankruptcy is allowed three years’ recovery of income of the bankrupt in excess of that needed for George to meet his and his family’s reasonable domestic needs.
True, public policy used to be that pension plans should not be taken into account, as outlined in the Welfare Reform and Pensions Act 1999. However, a case last year changed this.
In Raithatha vs Williamson, Williamson, a bankrupt, was aged 58 and had a pension plan he had chosen not to crystallise. He was over the age at which benefits were accessible, but had not drawn his pension benefits. Could these be made subject to an income payments order to force him to make payments to creditors?
It was argued the pension entitlements (a lump sum and/or an annuity) he was entitled to but had not yet elected to receive constituted a ‘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’. Therefore, it constituted income and the court was entitled to make an income payments order.
George can access his pension benefits and his trustee in bankruptcy could compel him to take his lump sum and pension income for a three-year period and, having done this, use an income payments order.
Income payments orders are discretionary and in assessing them, the court must consider the reasonable domestic needs of a bankrupt, determined by reference to the circumstances of each case.
The case was a bit of a surprise to begin with and was given leave to appeal.
Unfortunately, the appeal was settled out of court, so there is no further guidance and, for the time being, it is a precedent to follow.
Mike Morrison is head of platform marketing at AJ Bell.