Can a trustee in Bankruptcy force a Bankrupt to draw down a pension?

A recent ruling of the Court of Appeal has dismissed the trustee in bankruptcy’s appeal in the 2014 case of Horton v Henry. This brings to an end a long ongoing saga involving the emotive issue of a bankrupt’s pension.

The case addressed the question as to whether a trustee in bankruptcy can force a bankrupt to drawdown their pension entitlement so that the trustee can apply for an Income Payment Order (“IPO”) under section 310 of the Insolvency Act.

The Judge in the original case determined that the trustee in bankruptcy does not have a right to step into the shoes of the bankrupt and make decisions on his behalf relating to pensions. The Court of Appeal agreed.

This ruling overturns the decision in the 2012 case of Raithatha v Williamson. This case ruled that a person aged over 55 facing bankruptcy would have to use their pension savings to pay their creditors.

However, at the time individuals were only entitled to take a 25% tax-free lump sum from their pension and the majority of people would have had to buy an annuity with the remainder, meaning the remaining 75% of the pension pot was not vulnerable to creditors.

This was no longer the case in April 2015 when pension freedom was introduced meaning that those aged over 55 were given full access to their pensions, not just the 25% tax-free cash, and no longer had to purchase an annuity.

In the 2016 case of Hinton v Wotherspoon the judge ruled that the 2014 Horton v Henry judgement, although subject to appeal, was ‘plainly correct’ in that bankrupts over the age of 55 and had not drawn from their pension, then the fact that they could access their entire pension using the new freedoms should not mean that they should use their savings to pay their creditors by way of an IPO.

The recent Court of Appeal ruling on Horton v Henry means that the position is now clear and a bankrupt cannot be forced to drawdown his pension in the same way that a trustee cannot require a bankrupt to work and receive a salary which would be subject to an IPO.

This of course does not affect the trustees rights to claim pensions where the election to drawdown has already been made or to clawback funds where excessive contributions have been paid into the bankrupt’s pension.

The rulings over the last four years are an attempt to continue to encourage everyone to save whilst also protecting the rights of creditors in a bankruptcy.

Until the next time Debbie @HoskinFinancial

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