Here’s a scenario. It is September 2015. Basil is 59. After many years of running a successful company things seem to have gone wrong. As a last effort he poured thousands of pounds of his own money into the business to try to turn things round but eventually couldn’t afford to pay any more and the business had to close, owing debts to suppliers, the bank and his landlord. The company went into liquidation, he lost his job and income. Worse still, his bank and landlord had received personal guarantees from Basil for the monies owed to them, and when he couldn’t pay, as he had exhausted his funds in trying to save the business, he was made bankrupt. The house where he lived with his wife Barbara would most likely be repossessed by their mortgagees, as they could no longer afford to pay the last of the mortgage, and if they managed to avoid this it would probably be seized and sold by his Trustee in Bankruptcy under s335A Insolvency Act 1986, unless Barbara could buy out his interest by scraping together the money from her own savings and money raised from their family and friends. Things were not looking good.
But there was a future. Basil would be discharged from bankruptcy after 12 months, and although Basil’s health had been ruined by the strain of the last few years, and he was unlikely to work again he had built up a good personal pension pot of £500,000 during the golden years of his business and they could look forward to a comfortable retirement, even if it wasn’t as comfortable as they had expected a few years before.
However, a few months before the bankruptcy was over Basil received an application from the Trustee for an Income Payment Order under s310 IA 86. This asked for an order for him to pay over his “surplus income” to the Trustee. Basil laughed – his only income was state benefits and there was no “surplus”. However, he looked at the application again and was horrified to find that the application contained a request for
- An order for Basil, or the Trustee in Basil’s name, to make an application to his pension scheme for an immediate payment of the whole of his pension fund, as he was now entitled to under the pension ref0rms introduced in the Finance Act 2014
- The money to be paid over to the Trustee and applied
- in payment of the income tax due, amounting to some £154,887, and
- the balance of £345,123 in discharge of the bankruptcy debts and costs.
Basil was outraged. He understood that his pension was protected from bankruptcy, and besides, this was a terribly wasteful way of getting at the money, incurring tax as if it was all his income in the year of payment. So he sought advice, and was told to his horror that it was now the law. And a probable oversight by the powers that be.
Prior to May 2000 personal pensions went to the Trustee like everything else and were lost to the bankrupt. Employers schemes were a bit different as the only entitlement was to the benefits, not the capital sum, and these were often protected by being a discretionary payment by the trustees.
This was felt to be unfair and s11 Welfare Reform and Pensions Act 1999 provided that rights under pensions schemes approved by HMRC were excluded from the bankrupt’s estate, and the Trustee couldn’t get at them. All he could do was challenge excessive contributions, or include any income received from the scheme in an IPO. Even unapproved schemes could be protected if the bankrupt persuaded the court that they were needed to satisfy the reasonable needs of the bankrupt and his family. In order for a scheme to be approved it had to fulfil various criteria, one of which was that the maximum lump sum that could be withdrawn was 25% of the total, and only from the age of at least 55 years. The Act did go on to prohibit any forfeiture of rights under personal pension schemes by reference to their bankruptcy s14. But on balance the pension looked pretty secure.
Trustees were initially resigned to the change, but as time went on there were rumblings that there might be a way round and in April 2012 the Bankruptcy Court ruled in Raithatha v Williamson EWHC909Ch that an IPO could be made ordering the bankrupt , or the Trustee, to apply for a withdrawal of the 25% maximum sum and for it to be used to pay the debts. Mr Williamson appealed on a number of grounds, including an argument that he couldn’t be forced to exercise an option that he didn’t want to exercise, and that until he did so this wasn’t “income” and so couldn’t be subject to an IPO. It was also in breach of his rights under the ECHR to personal property. However, his appeal was compromised shortly before it was heard, and so the case stands, and is binding on DJs and Circuit Judges.
The case was in fact following on from a very similar case of Blight v Brewster EWHC165Ch although that case wasn’t referred to in the judgment in Williamson. The difference in Brewster was that the Defendant wasn’t bankrupt, he just had judgments entered against him. Again he was ordered to exercise an option and call down a 25% lump sum from Sun Life, so it could be used to pay his debts, and the Claimant was authorised to write on his behalf if he wouldn’t co-operate. Although it can’t have helped his case that the judge clearly regarded him as a fraudster.
So up to 5th April 2015 25% of a personal pension is accessible to an IPO. However, as these benefits are normally only payable from the age of 55, and applications for IPOs have to be made before the bankruptcy is discharged, and can only run for 3 years, they really only affect debtors from 55 years upwards, who have not yet crystallised their pension by the purchase of an annuity or other long-term investment.
In the Budget speech Mr Osborne announced a wholesale reform of pensions legislation. Part of this was to allow the public to manage their own pensions, and to withdraw their funds and invest or use them as they thought best. This was a generally popular proposal, and most of the discussion has been on the tax implications, the risk of people wasting their money on cars and flashy holidays and the like.
Part of the reform includes changes being imposed on pension schemes by the government requiring them to allow people to withdraw funds in accordance with the new regime. These are terribly complicated, and I won’t trouble you with them now. But they will take effect from 6th April 2015, the start of the next tax year. My understanding (and I haven’t been able to find chapter and verse while writing this piece) is that the freedom will apply from the date that the pension can be taken, and in most cases this will remain at 55 years.
What has been overlooked is the effect that this will have on IPOs against pension pots. And there is clearly only one answer: Trustees will be able to apply for ALL of the vulnerable pot to be drawn down. The first 25% will remain tax-free, but the rest will be taxed at normal income tax rates – 20% 40% and 45% according to income.
All that they will have to overcome are the provisions in s 310 IA [link above] that:
(2) The court shall not make an income payments order the effect of which would be to reduce the income of the bankrupt when taken together with any payments to which subsection (8) applies below what appears to the court to be necessary for meeting the reasonable domestic needs of the bankrupt and his family
S(8) refers to guaranteed minimum pensions and protected rights under pension schemes. So the bankrupt must be left with enough to live on, but only just. And then only after taking account of pension payment which cannot be actually seized themselves.
It seems unlikely that this was intended. It hardly seems the best way to encourage entrepreneurs and the risk-takers needed if the economy is to grow as this government wants it to. And there has been no publicity apart from a few notes on insolvency websites. But there we are. You have been warned.