City Trustees - part of Mattioli Woods

News and Media

25 February 2013

You can take away my home, but you will never take my pension!

Since the introduction of the Welfare Reform and Pensions Act 1999, the legislation around how a bankrupt individual´s pension is to be treated became clear. If the bankrupt was in receipt of pension income, the trustee in bankruptcy (TIB) could apply for an income payments order (IPO), and if no pension income was being paid, the trustee in bankruptcy had no recourse to the pension fund.

Naturally, in true pension style, these rules seemed too straightforward, and when pension rules are simple to understand, we should always expect change.

Cue Raithatha v Williamson 2011

As a brief background, Mr Williamson´s pension fund was in excess of £1 million. Raithatha (the TIB) made an application for an IPO in respect of Mr Williamson´s pension commencement lump sum (PCLS) entitlement, along with any income he should be receiving.

As Williamson was 59 years of age, he was allowed to draw a PCLS and income from his personal pension plan. Deputy Judge Livesy QC decided that in light of the fact that he could receive these by merely asking for them, demonstrated that he was ‘entitled’ to this income, and therefore ruled in favour of Raithatha. Until this decision, it was generally understood that undrawn income could not be caught by an IPO.

Whilst this case was due for an appeal, both parties came to a confidential settlement and therefore the original decision still stands as a precedent. Although the above is extremely great news for trustees in bankruptcy, the question remains…

…What next?

The Rathaitha decision was in respect of a personal pension plan and there has been no clarification of whether or not this will apply to occupational pension schemes or whether occupational schemes are still protected under S.91 of the Pensions Act 1995.

For schemes that are trust-based, the provider will normally act as the professional trustee and in the unfortunate event that any client is made bankrupt, they can no longer remain as a trustee of the scheme by virtue of the Trustee Act. Therefore any payment of PCLS or income would be at our discretion as professional trustee, and not the client´s. Whether this is sufficient protection from the TIB is yet to be seen.

It is clear that most insurance-based providers are now relying on the Raithatha judgement as gospel, and paying PCLS to the TIB. Mattioli Woods recently had a client who happened to be in the unfortunate position whereby the TIB was looking to force the client to take PCLS from his SIPP.

The scheme concerned elected to fight the request and, after much correspondence, the TIB decided not to take any further action. In this case, it was clear to all parties concerned that going to court would be a costly affair, and in most cases these costs would be borne by the PCLS and therefore once the legal and admin fees have been paid, there could be very little left for the TIB.

How big does the fund have to be before it becomes worthwhile for a TIB?

The judge in Raithatha confirmed that one of the other reasons for the decision was that even with the PCLS being paid, there was still sufficient capital left in the fund to provide a decent level of income in retirement, i.e. £40,000 to £50,000 per annum.

With gilt yields at a historical low, one can argue that any fund below £450,000 would provide an income of less that £20,000 per annum and therefore should not be open to question. Furthermore, if by chance smaller pots are attacked, serious attention should be made to the Boyden v Watson 2004 case, where a judge rejected an application for an IPO on the grounds the bankrupt had insufficient funds once their reasonable costs were met, and included in these costs were private school fees for the children!

The moral of the story is that if you do happen to have any clients in similar situations, it would be prudent to contact the scheme administrators as soon as possible to ensure they stand their ground. If not, scheme assets could be sold to fund PCLS and the fund could find itself in a position where it is taxable on death.

John Glover, Business Development Manager


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