In Raithatha, the High Court ruled that an IPO could be made not just where the bankrupt was in actual receipt of the pension income, but also where the bankrupt had an entitlement to elect to draw the pension but had not exercised that option at the time of the application.
Before Raithatha, pension benefits which were not in payment were generally regarded as protected from creditors as, under the WRPA, a bankrupt’s rights under a registered arrangement do not vest in the TIB. However, the Court held that as the bankrupt had reached the scheme’s minimum pension age, although he continued to work, the pension could be considered as income and therefore form part of his bankruptcy estate and thus be available to repay creditors. The Court considered that as a matter of policy, an undrawn pension could be the subject of an IPO, as otherwise it would be difficult to justify creating two categories of pension payment, one of which would be exempt if the bankrupt did not elect to receive it. As this election is a factor wholly within the control of the bankrupt, it could be used as a means of avoiding paying creditors.
The decision resulted in a successful application by the TIB for a Court order compelling the bankrupt to elect to draw his previously undrawn pension and then to apply that income towards satisfying his bankruptcy creditors.
As a result of the decision in Raithatha, it appeared that undrawn pension scheme benefits were no longer safeguarded from a bankrupt’s TIB and creditors. The Raithatha judgment was a warning to all individuals with substantial pension pots, which had, until then, been considered beyond the reach of the TIB. A bankrupt who reached the scheme’s minimum pension age, even when he was still employed and working, with no intention of taking his pension, could be forced to access pension savings to pay off creditors where he was entitled to draw benefits but chose not to. Leave to appeal the High Court decision was granted, but the appeal was not progressed as the parties reached a confidential settlement. The full potential impact of the decision therefore remained unclear and it was unsurprising that only two years later, another case came before the High Court on the same issue, on which a different decision was reached.
In Horton, the bankrupt had four personal pension policies, all of which fell outside the bankruptcy estate because, although they were not held under an occupational pension scheme, they were held under a registered arrangement. As in Raithatha, the bankrupt was not in actual receipt of pension benefits from the registered scheme, but was entitled to draw his pension and had not chosen to exercise that option. During the bankruptcy, the TIB applied for an IPO seeking a share of lump sum payments and income from the pensions.
The bankrupt opposed the application and largely relied on the arguments advanced by the bankrupt in Raithatha that he was not entitled to a “payment in the nature of income” until he had elected to draw it. He claimed that he had a right only to make an election to receive the pension and that his right to make an election was excluded from his bankruptcy estate and that the Court had no power to compel him to exercise that right.
The Court held that the bankrupt’s undrawn pensions could not be the subject of an IPO. Although the circumstances of the Horton application were acknowledged by the Court to be indistinguishable from Raithatha, it was held that Raithatha was wrongly decided and the Court declined to follow that decision. The Court noted that in order for the bankrupt to receive the pension income, he would have to make a number of decisions and elections. Unless and until these were made, the pension rights were uncrystallised and uncertain in value. The Court also considered that the bankrupt was not “entitled” to payments, as “entitled” suggested a reference to pensions in payment of definitive amounts that had become contractually payable, and the TIB had no right to make such elections or decisions relating to the pension as it was not part of the bankrupt’s estate.
Hinton involved a bankrupt’s pension benefits under a Self-Invested Personal Pension Scheme (SIPP) which fell outside the bankruptcy estate. Again, although the SIPP benefits were not part of a occupational pension scheme, they were held under a registered arrangement. The Court in this case (in which it did make an IPO), considered the point at which a bankrupt would become entitled to pension income. The judge noted that if the bankrupt had made an election to enter drawdown but had neither actually withdrawn a lump sum, purchased an annuity, nor started to receive an income from the fund, the entitlement to income had not arisen and thus no IPO could be made. It was possible, for example, for a pension fund to be subject to an election to drawdown, without any instructions as to payment (or annuity purchase) having been given. Only once such instructions had been made was there an entitlement which could found the basis of an IPO. However, whilst helpful, the Court’s comments on this aspect of the case were obiter, as the bankrupt had actually made his election and had started to receive specific and quantified payments from his SIPP.