Governments throughout the Western World want us all to save for our old age so we’re less of a burden on the state. That’s why we get tax relief on payments into our pension funds, it’s not out of the goodness of their hearts.
But there always has been confusion where different aspects of the law cross over with insolvency law, and one such area is that of pensions. Up to May 2000, if you went bankrupt, the trustee could get his hands on some of your pension – you see while insolvency law talks about assets that are excluded from a bankruptcy – and thus which you could keep if you did go bankrupt – pensions were not firmly on the list of ‘excluded assets’. This meant that people were losing money they’d put into a pension many years before they started having financial problems, and because the Trustee could get his hands on the pension money, the bankrupt was becoming more of a burden on the state. People were also asking themselves why they should bother putting money into a pension pot when they most needed it only to find it taken away from them later on, often for reasons outside of their control. Also, surely when looking after people in their old age is one of the biggest problems this country faces, surely the law didn’t sit happily with common sense or greater public policy?
The government realised this wasn’t working, so for people going bankrupt from May 2000, they changed the law, so that after that date you could generally keep your pension if you went bankrupt.
All was fine for a while….it was a bit like an uneasy truce, things didn’t seem quite right… trustees in bankruptcy still had a duty to maximise realisations for the creditors but couldn’t get their hands on what could be the bankrupt’s biggest asset.
Under the wording of the insolvency law (it goes back to 1986!), any income you actually receive – or become entitled to – from any source, including your pension, is subject to any income payments agreement or income payments order that might be in place – this is a 3 year agreement whereby you pay your surplus income into the bankruptcy. I can understand that, but you would have thought that at least your ‘capital’ is safe… at least it was thought to be…
In 2012 a case passed through in the High Court – Raithatha v Williamson – in that case the judge decided that an income payments order could be made where the bankrupt had the right to elect to take a drawdown pension even if he hadn’t yet done so. The trustee could even force the bankrupt to draw down a capital sum and give it him if it meant he had income above his reasonable domestic needs (which would almost always be the case given the size of the drawdown). This drove a coach and horses through the general principle of ‘trustee cannot touch’ for people who were nearing retirement age – even as early as 55. So now a trustee could essentially force a bankrupt near 55 to take a drawdown, whether they wanted to or not, grabbing money previously thought to be safe and imposing an increased burden on the state down the line! For some bankrupts we were essentially back to something like the old rules which the government tried to change because they didn’t like them!
Then in December 2014, a judge in another High Court – this time in the case Horton v Henry – came to the opposite decision! In that case the judge decided the trustee in bankruptcy could not get an income payments order over a personal pension that is not yet in payment as there was no ‘legal entitlement’ on which the order could bite. So now we have two conflicting High Court decisions! Until the Court of Appeal decides one way or another, we’re stymied! What do advisers tell people in their 50s, 60s or 70s, who are contemplating bankcuptcy?
But it applies only to people in their 50s, 60s or 70s, right, and only for small sums of money, right?
Well yes and no, you see in April 2015 the pensions laws in the UK change, enabling people over 55 to drawdown all their pension from their pot.
What this means is that anyone 52 years or older (allowing 3 years for an IPO/IPA) should, if at all possible, defer making any decisions to go bankrupt or not until the appeal is heard and decision made, or the government bring in some emergency legislation. It might be that you will have to use other options such as a Debt Management Plan or Token Payments to buy that time.