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Pensions in bankruptcy

14 January 2015

The ongoing impact of the cases of Raithatha and Horton in light of the 2014 budget

In March 2014 the Chancellor announced that from April 2015 individuals of the minimum pensionable age will be able to gain access to the full amount of their pension fund by way of a lump sum payment. This has potentially opened the door to Trustees in Bankruptcy (“Trustee”) being able to access the entirety of these funds, extending further the loophole following the decision of Raithatha -v- Williamson [2012] 1 W.L.R. 3559 (“Raithatha”), although now somewhat restricted following Horton –v- Henry [2014] EWHC 4209(ch).

At present individuals of pensionable age can access a 25% tax free lump sum of their fund. Under the government’s reforms announced in March 2014, the remainder will also become available to access, albeit subject to income tax.

This raises key questions for both those entering bankruptcy, and Trustees, as to what powers Trustees will have to compel a bankrupt to exercise their option to take their lump sum so that it can be utilised to make payments to creditors. In light of Raithatha and the Trustee’s duty to maximise the realisation of a bankrupts assets in order to satisfy their liabilities, it is almost certain that they will seek to compel a bankrupt through the court to access their entire pension fund, although this is now subject to the ruling in Horton –v- Henry (discussed below).


The Welfare Reform and Pension Act 1999 states that all approved pension entitlements are excluded from the estate of a bankrupt which may be taken into account and accessed by a Trustee. This is subject to Section 310 of the Insolvency Act 1986 which allows a Trustee to apply for an Income Payments Order, allowing the Trustee to (potentially) gain access to pension funds which had already been accessed by the bankrupt, for example the 25% tax free lump sum which a bankrupt may have elected to take.

Raithatha extended this ability by allowing a Trustee to compel a bankrupt to draw down the 25% tax free lump sum available to him. This was on the basis that the lump sum constituted a “payment in the nature of income” to which the bankrupt was entitled, and so the bankrupt could not simply choose to avoid losing part of his pension, when someone else may have elected to take a lump sum and so be in a much worse situation as a result.

Bankrupts are protected to a certain extent, as when making an Income Payments Order, the court will consider the reasonable needs of the bankrupt and their family. This was demonstrated in the recent case of X (Application for Income Payments Order), Re [2014] B.P.I.R. 1081 which considered Raithatha, and on the facts declined to make an Income Payments Order and compel the bankrupt to take his pension, as it would have reduced his annual income below the figure on which he required to live.

Recently Robert Englehart QC, in reaching his decision in the case of Horton v Henry [2014] EWHC 4209 (Ch), declined to follow the decision of Raithatha and accordingly did not allow the Trustee to compel the bankrupt to draw down his pension. This decision was reached on the basis of a different interpretation of Section 310 of the Insolvency Act 1986, with the judge deciding that reference to the bankrupt becoming entitled to a pension includes only pensions already in payment. In reaching this conclusion the judge stated that he now hoped that the Court of Appeal would have the opportunity to consider this area, and so provide certainty moving forward.

It is understood that this matter will be heard by the Court of Appeal in spring of this year, subject of course to it not being vacated should the parties reach a settlement as was the case in Raithatha. This leaves Trustees in Bankruptcy in a difficult position. Any application for an income payments order must be made during the bankruptcy (usually 1 year). Depending on the pace at which the Court of Appeal case progresses, trustees may have little option but to file protective applications for income payments orders in appropriate cases pending the Court of Appeal’s decision.

Moving forward and the potential issues that are faced

All individuals of pensionable age will soon be able to access 100% of their pension at the age of 55 (to be increased to 57 as of 2028 when the minimum personal pension age is increased). Until such time as this matter is considered by the Court of Appeal, it is highly likely that Trustees will argue that, with reference to Raithatha, the Court is able to compel a bankrupt to exercise their new rights, and so potentially gain access to the entire pension fund at the age of 55 by way of income payments order (subject always to ensuring that the Bankrupt retained sufficient funds to sustain his reasonable living costs).

It is likely that the court and the Government will face questions in respect of these potential changes and the impact they will have on bankruptcy and what was intended by way of public policy when the Welfare Reform and Pension Act 1999 was enacted. A key aspect of these questions will be in respect of the fairness, given that an individual of pensionable age is at risk of losing a potentially highly valuable asset, while someone younger, who could also have a pension fund of great value, will be protected. This in turn leads to questions, dealt with in Raithatha and rejected, that this ability is discriminatory on the grounds of age.

It remains to be seen whether further steps will be taken to fall in line with the original policy reasoning behind the Welfare Reform and Pension Act 1999, or whether Trustees moving forward will have access to 100% of an individual’s pension should they have reached the minimum pension age.

This article was written by Roger Elford and Ashley Armitage.
For more information please contact Roger on +44 (0)1483 252 531 or Ashley on +44 (0)20 7427 6466.