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Pension savings are not safe from trustees in bankruptcy

by Mike Morrison on Feb 13, 2013 at 16:24

Pension savings are not safe from trustees in bankruptcy

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.

Landmark case

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.

Precedent setting

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.

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9 comments so far. Why not have your say?

Julian Stevens

Feb 13, 2013 at 16:53

Yet another reason, as if any were needed, not to bother locking away money in a pension plan.

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Kate Brookes

Feb 13, 2013 at 16:57

How shocking, this is very interesting. Could he not have argued that having to take his pension income early would affect his family income for the rest of his life beyond the 3 years due to a reduced annuity because of his age?

Does this precedent not now discriminate against any bankrupt over the age of 55? It surely cannot be one law for some and another for others on the grounds of age?

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Greg M

Feb 13, 2013 at 17:26

Why shocking? Surely it's more shocking that a bankrupt could normally have expected to keep all his pension fund and the tax relief he's had on it safe for his own use later, while owing money to people today. Now *that* I've always thought was unfair!

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Kate Brookes

Feb 13, 2013 at 19:45

Shocking is when someone becomes bankrupt as a result of the death of a loved one, and can no longer keep it together, or when someone becomes ill and can't work and never got insurance, Or when you are a naive older couple , financially unsavvy who's bank just lends and lends until you loose your family home.before you realise it it unsustainable. Or when you get made redundant and can't find another job, or suffer from depression.......

These are all cases I have seen, so don't judge the bankrupt, because there by the grace of God go any of us.

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David Trenner - Intelligent Pensions

Feb 15, 2013 at 09:00

Kate, Have you actually looked at Raithata v Williamson? It brings back memories of Landau, with the facts of the case being taken into account. As I understand it Williamson's pension fund arose from a company scheme funded by a company he co-owned. The company went bust with Williamson owing his co-owner significant amounts of money.

If these facts are correct it would be bizarre to find that Williamson's former business partner was completely stuffed, while Williamson walked away with a £1m pension fund arising from company contributions!

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Kate Brookes

Feb 15, 2013 at 09:43

@David Trenner No, I haven't, but I will go and look at it now. I am concerned that in order to be able to have access to the pension at all, you have to be over the age of 55. Someone younger would not have access to their pension and therefore it could not be taken into account by the trustees. Surely this is discrimination on the grounds of age?

My understanding was that since the change in the law, pensions could not be taken into account in bankruptcy, but this seems to fly in the face of that law, only if you are aged 55 or over. Forcing people to crystalise their pensions earlier than NRA could have repercussions for their income levels for the rest of their lives, way beyond discharge from bankruptcy or the end of an IPO.

I'd like to go and do some more research on this..........if anyone can enlighten me further I would be very grateful.

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David Trenner - Intelligent Pensions

Feb 15, 2013 at 09:57

Every now and then courts seem to take a sensible pragmatic view! Raithata v Williamson seems to fall into this category. Brooks v Brooks (as the name suggests a divorce case in 1995) was another, and there was another divorce case where the judge refused to agree a pension sharing order between two bankers who were only in their 30s. Landau (1996) looks like a judge taking a dislike to the respondent! Landau was a solicitor who argued his own case. He contrived to be made bankrupt aged 61 after changing the NRD on his NPI pension from 70 to 65. The judge took the view that when the plan matured the TiB should get a share.

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Chris F.

Feb 15, 2013 at 13:04

Would it be fair to say that "pensions are generally not available to the trustees in bankruptcy, but don't push your luck or try to deliberately play the system"?

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David Trenner - Intelligent Pensions

Feb 15, 2013 at 13:12

That is how I would see it. Clearly if someone in receipt of a significant pension goes bankrupt the TiB will expect to get an income payments order.

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