Savers who become bankrupt but have not yet drawn their pensions will not have to hand them to creditors, after a court ruling on Friday put an end to fears that pension pots were at risk.
All the problems that would have come into the open if the decision had gone the other way have gone away
Chantal Thompson, Baker and McKenzie
The Court of Appeal upheld the High Court’s ruling on Horton v Henry, originally heard in 2014, settling legal difficulties arising from a conflicting judgment in Raithatha v Williamson [2012], and the introduction of the pension freedoms.
Pension lawyers welcomed the clarity and strength of the decision, and said that it was consistent with the thinking behind the relevant legislation.
Settling differences
Raithatha v Williamson [2012], also heard in the High Court, drew criticism for concluding that bankruptcy trustees could obtain an income payment order against any pension that the debtor was eligible to withdraw.
At the time of the decision, this consequence was rather muted by the fact that savers were required to buy an annuity, thus limiting the scope of the IPO to the amount of income received by the debtor during the bankruptcy period.
But with the advent of freedom and choice, the ruling theoretically opened up bankrupt over-55s’ entire pots, even if they had not yet accessed their pension.
And with statistics compiled by The Insolvency Service showing that personal insolvencies increased for the fourth consecutive quarter in Q2 of this year, Mike Morrison, head of platform technical at investment platform AJ Bell, said the judgment could have had a significant effect.
"If you had a £5m self-invested personal pension... technically a trustee in bankruptcy could put on the income payment order ‘£5m’, which seemed a little bit draconian,” he said.
Confusion stalled bankruptcy proceedings
The subsequent judgment of Horton v Henry ruled against the creation of this situation, finding that bankruptcy trustee Robert Horton would not be granted an IPO against the uncrystallised pension pot of Michael Henry.
The existence of two conflicting High Court judgments created legal confusion, and according to experts stalled the progress of bankruptcy proceedings, until the appeal verdict was released last week.
“It does seem a really clear and consistent judgment,” said Chantal Thompson, partner at law firm Baker & McKenzie. “All the problems that would have come into the open if the decision had gone the other way have gone away”.
She said the decision was in keeping with the tone of pensions policy set out in the post-Maxwell scandal Goode Report, and avoided thorny issues like whether the rule applies to income drawdown.
Of course, the Horton decision could still theoretically be appealed again, this time in the Supreme Court. But for Matthew Swynnerton, partner at DLA Piper, this is likely to be the final interpretation.
How bankruptcy orders could drain savers' retirement pots
The April flexibilities could make the retirement savings of those in financial difficulty vulnerable to demands from creditors, with courts set to have their final say on whether a saver’s uncrystallised pot is open to a claim.
“I think given the general industry feeling following the Raithatha decision and the fact that we have now got an Appeal Court judgment, and it’s been looked at and scrutinised in quite a lot of detail now, it seems unlikely we’ll have a further appeal,” he said.
There may, however, be space for more legal wrangling in other, similar areas. Experts observed that another High Court judgment, Blight v Brewster [2012], established that individuals who are unable to pay debts but are not legally bankrupt could still be the subject of an IPO against their pension.
