Can they touch my pension?

Coin Dropping Into Piggy Bank

The title of this piece is the question I am asked regularly by individuals who are threatened with personal insolvency and are (understandably) concerned their personal pension may be used to repay creditors.

Personal pensions used to be an asset that could be realised for the benefit of creditors. Provided the bankrupt was over the age of 50 years a trustee could realise the tax-free lump sum, the annuities or, in many cases, both.  This all changed with the introduction of the Welfare Reform and Pensions Act 1999 (“WRP”) where personal pensions were primarily no longer bankruptcy assets.

What has been long debated is whether a pension ceases to be a pension and becomes income a person is entitled to when they exercise their right to draw down the pension benefits and, therefore fall outside the protective ring of the WRP.

A bankrupt has a statutory duty to cooperate with their trustee and may face serious consequences for failing to comply, including imprisonment. A trustee also has general powers to seek and overturn previous dealings.  For example, back in the early 1990s many matrimonial homes were transferred into the sole name of the non-business owner for the consideration of “Love and affection” and were, quite rightly, deemed void.  These general duties and powers assist a trustee in his duty to maximise realisations for the creditors and the income derived from pension lump sums and annuities provide funds that assist repayment.

In the case of Raithatha –v- Williamson [2012] EWHC 909 these duties were tested when a trustee demanded the bankrupt exercise his rights to receive the benefits of his personal pension and the judge determined the pension benefits did fall within the definition of income.  Bad news for pension holders who could, by way of this decision, be forced to “Retire early” when it came to their pension benefits.

However, on 7 October 2016 the Court of Appeal overturned the Williamson case. In the matter of Horton –v- Henry the judges decided uncrystallised pension rights did not constitute “Income” and neither the court nor the trustee had power to decide how a bankrupt should exercise elections open to them in relation to their pensions.

This decision does appear to be contrary to the general powers and even promotes debt avoidance by pouring money into personal pensions. However, a trustee can challenge excessive pension contributions and, as I proved a few years ago, demonstrate the pension was merely a tool to defraud creditors.  In that sort of scenario a trustee can obtain some (or all) of the pension benefits.

Assuming the Horton case will not be appealed to the Supreme Court the message appears clear.  If you are over 50 years of age then unless you really need the pension benefits resist exercising your rights to receive them until you are discharged from bankruptcy.  Alternatively, if in doubt you should consult an insolvency practitioner or a pension advisor as a lack of patience (in terms of when to exercise your rights) could prove costly for your future.

Gary Pettit

Can I go bankrupt please?

Every year there are literally thousands of people confronted with debt that reaches a point of being unmanageable, whether through bad luck, an inability to foresee the problem that was looming or, in some cases, other reasons. Until recently, these unfortunate people have been able to petition the court for their own bankruptcy, provided they could afford to pay the petition costs.  This is what we refer to as a “Debtors’ own petition”.

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However, from 6 April 2016, instead of going to court, individuals wanting to make themselves bankrupt will have to apply on line through a portal on the Government website at GOV.UK. The application fee is £130 (which is £50 lower than the original petition cost) and this can also be paid online.  If you pay online the applicant will even be allowed to pay the cost by instalments.

The application will be considered by an adjudicator within the Insolvency Service who must determine whether a bankruptcy order is made within 28 days of the application being submitted. This period could be extended by up to a further 14 days if the adjudicator requires further information before being able to determine the application.

So, what happens on adjudication? There are two options for the adjudicator, namely:

  1. Agree a bankruptcy order should be made. Upon making this decision the adjudication/application papers are passed over to the Official Receiver who will take all appropriate steps to administer the bankruptcy estate from thereon; or
  2. The application is rejected. Although it has not been made clear why an application would be rejected, it can be assumed grounds for rejection will include a view an alternative method of addressing the debt problem is better than bankruptcy. This will include procedures such as voluntary arrangements or debt relief orders. However, if rejected, the debtor may apply within 14 days of being notified for the adjudication to be reviewed. Should the review uphold the rejection then the debtor may within 28 days of the review determination apply to court who may make an order they see fit, which may include making a bankruptcy order or dismissing the application.

 

These changes only relate to debtors’ own petitions. A creditor who is owed in excess of £5,000 may still proceed to petition the court for the debtors’ bankruptcy as before because this procedure remains unaffected by the changes.  Equally, the procedure for petitions presented by personal representatives of insolvent estates or partners of insolvent partnerships remain unchanged.

So, why the change? At present, the courts are heavily overburdened and the Government are looking at ways to ease that burden.  Encouraging alternative dispute resolution methods (such as mediation or arbitration) is one way.  The second has been the reduction of bankruptcy petitions heard by the court.  According to Insolvency Service statistics there were 11,423 debtor own petitions filed in 2015 (compared with 4,374 creditor petitions).  Therefore, on the face of it, amending rules that remove debtor own petitions from being a court process will remove a significant volume of administrative court time.