However something which hasn’t been as widely reported is the effect that bankruptcy may have on personal pensions.
In the coming months, The Court of Appeal will establish definitively whether a trustee in a bankruptcy can access an individual’s pension pot to repay debts, following a plethora of conflicting cases in the past few years.
In 1999, the Welfare Reform and Pensions Act ruled that there were only two circumstances in which a trustee in bankruptcy could access an individual’s pension - if money was deliberately put into a scheme knowing that bankruptcy was likely, or using Section 310 of the Insolvency Act 1986. This requires the bankrupt to agree to an Income Payments Order which involves making regular payments of a specified amount or proportion of their income. As a bankrupt should be left with enough for “reasonable domestic needs”, it was expected that uncrystallised pension funds would not be included.
However two recent cases have challenged this assumption. In the case of Raithatha v Williamson in 2012, the bankrupt, Mr Williamson, was entitled to draw his personal pension but had not yet done so.
As his pension fund was valued at £990,000, his Trustee applied for an IPO to claim a lump sum payment and 3 years worth of pension income.
The Judge stated that:
“A bankrupt does have an entitlement to a payment under a pension scheme not merely where the scheme is in payment of benefit but also where, under the rules of the scheme, he would be entitled to payment merely by asking for payment."
The Court therefore agreed that the entitlement to draw a lump sum fell within the definition of a "pension income", particularly because Mr Williamson’s private pension fund amounted to a significant sum. Even if he lost the lump sum he would still be left with an annuity of somewhere between £23,000 and £43,000 a year, which was deemed adequate for his “reasonable domestic needs”.
Around the same time, in Blight v Brewster (albeit not a bankruptcy case), the defendant was also required to draw down the 25% tax free lump sum from his pension.
The High Court stated:
"The idea that the fraudster and forgerer can enjoy an enhanced standard of living at his retirement instead of paying the judgment debt would be a very unattractive option. The Defendant clearly has the means of paying the 25% to the Claimants: all he has to do is to give notice to the pension provider."
These cases could well provide an insight into the future of bankruptcy following the pension reforms. Currently cases like this are rare, affecting only those who can withdraw their pension but choose not to, and additionally where an IPO is issued to gain access to the 25% tax-free lump sum.
However following the reforms, the 25% lump sum limit will be abolished and a pensioner will be permitted to draw their entire pension – therefore potentially so could a trustee in bankruptcy.
If the Court of Appeal sides with the Raithatha ruling, many more people could be affected; in particular anyone who is over 52, or anyone who has gone bankrupt whilst a three-year IPO is in payment.
Of course a bankrupt still needs to be left with enough for domestic needs, but unless additional protection is introduced, they could potentially lose a substantial amount of their pension pot. A recent survey by IVA.co.uk found that 70% of people would not willingly withdraw their pension early to settle debts, although they may not have the choice following the reforms.
Additional figures from accountancy firm Moore Stephens revealed that 5,672 pensioners went bankrupt in 2013, up from 4,727 at the height of the recession. Since 2009, there has been a 22% rise in bankruptcies among over-65s.
Andrew Tully, Pensions Technical Director at MGM Advantage, said:
“It may well be an unintended consequence of the pension reforms, allowing the trustee-in-bankruptcy much greater access to an individual’s pension savings. The court will have to leave the individual with a reasonable standard of living so it’s unlikely in any case that they could take all of the pension benefits, but potentially they may have greater access than was the case under the old rules.
“On a slightly separate point, individuals over age 55 who are in financial difficulties may well access their pension savings in future to try and pay down debt and prevent themselves going into bankruptcy in the first place.”
It is clear that until an official legal decision is made, debt management and advice is essential. If it is decided that pensions aren’t protected in bankruptcy, then debt advice to that age group may have to change significantly.
So while pensions minister Steve Webb said that under the reforms, pensioners could “buy a Lamborghini but know that they'll end up just living on the state pension - that becomes their choice”, it appears that for some, they will still have no control over their pension funds.
