In an eagerly awaited decision, the Court of Appeal ruled earlier today that creditors cannot access a bankrupt's pension benefits which have not come in payment.
Where a person is made bankrupt, creditors cannot generally access the person's pension fund. The rationale for this is that the pension fund is there to support the person's retirement and allowing creditors access to it may mean the person becomes dependent on the state. This rationale has, however, been undermined by the recent freeing-up of how individuals may use their pension funds and the ability to take the full value of a fund in one or more payments from age 55. To prevent abuse of this protection, rules allow creditors to clawback excessive pension contributions which have been made with a view to sheltering them from creditors.
Although creditors may not access the full, capital value of a bankrupt's pension fund, where a pension is in payment, the court may order that some or all of the payments are applied for the benefit of creditors for up to three years but, leaving enough income for the reasonable domestic needs of the bankrupt and his family. The question that the Court of Appeal had to decide was whether creditors also have the power to bring benefits into payment – an issue which had been subject to conflicting High Court decisions. The potential for creditors to trigger the withdrawal of the full value of a fund as a single payment under the new pension freedoms gave added significance to the decision.
The court decided that creditors do not have the power to bring benefits into payment.
The ruling means that creditors' access to a bankrupt's pension fund remains a matter of pot luck, depending on whether the person has started their pension. The new pension freedoms mean the ruling has serious implications for creditors as individuals are increasingly likely to dip into their pension fund for ad hoc payments or, leave it untouched for their dependants to inherit, rather than sign-up for regular annuity payments which creditors can access. Even had the ruling gone the other way, creditors' rights would still depend on the age of the bankrupt as pensions funds cannot normally be accessed before age 55. With a pension fund often being one of a bankrupt's most valuable assets, it seems time for the Government to review whether, in light of the new pension freedoms, the pendulum has swung too far in favour of bankrupts and consider whether it would be more appropriate for creditors' rights to access pension funds to be based more on the capital value of a bankrupt's fund and their ability to build-up new retirement savings.
Horton v Henry – Court of Appeal – 7 October 2016 (2016 EWCA Civ 989)