How bankruptcy orders could drain savers' retirement pots

Pensions lawyers are fearful that the new retirement freedoms will make the pension pots of those in financial difficulty particularly vulnerable to demands from creditors, and are seeking clarity from the Court of Appeal following two key High Court rulings.

Last month, a High Court judge ruled in the case of Horton v Henry that he could not grant bankruptcy trustee Robert Horton an income payment order to claim against the uncrystallised pension pot of Michael Henry.

This decision came in direct conflict with the earlier case of Raithatha v Williamson, where trustee Situl Devji Raithatha was granted an IPO by the court and allowed access to the untapped funds of Michael Williamson because the latter was entitled to his £1m pension “merely by asking for payment”.

Chantal Thompson, a partner at law firm Baker & McKenzie, said: “The basic principle is that pension rights are inalienable. In principle, as long as there isn’t income coming from the pension, the trustee in bankruptcy can’t access the pension.

“The question here is whether the [bankrupt] individual actually has the right to take money from his pension scheme,” she added. In such a case, it may be vulnerable to a payment order.

Two key elements are whether the saver is old enough to take their pension and whether they have put the steps in place to receive payments or start drawing from their pension.

Henry was eligible to receive income from his three personal pensions and one self-invested personal pension, but in order to access the uncrystallised funds he would have had to make a series of choices. 

Helen Powell, professional support counsel at law firm Allen & Overy, said the questions included: “Is he going to take a lump sum? Is he going to take regular income? How? In what amount and in what combination?” 

She added: “Post-April 2015 these are the kinds of choices that members are going to be looking at because they will have so much flexibility available to them. It’s only once those choices have been made that it would… be possible to know what amount would be available to trustees in bankruptcy.”

Powell said if the Court of Appeal stands by the ruling then uncrystallised funds would appear to be safe from creditors because of the sheer number of choices required before access could be granted.

However, if the individual has designated their funds for drawdown, this would be much closer to a position in which payment just needs to be requested. This was the rationale used in the Raithatha v Willliamson judgement, she explained.

Deborah Clark, head of private tax and trusts at law firm Mills & Reeve, who acted for Henry, said: “From April, the access to pensions will become far wider, enabling people in theory to draw down their entire pension fund.

“You can instantly see in that scenario, if people do have those rights and you have an individual become bankrupt, would that mean they could lose their entire pension pot?”