Tom D'Arcy

Bankruptcy and Pensions – further developments

In my blog in March this year, I discussed the possible effect of the new pensions rules coming into force in April 2015, whereby a Trustee in Bankruptcy may be able to force a debtor to draw down the whole of his or her pension and claim the same under an Income Payments Order (IPO) for the benefit of the creditors in the bankruptcy. This topic was the subject of an interesting debate recently on Radio 4 – Moneybox, featuring two Insolvency Practitioners, Situl Raithatha (whose case Raithatha v Williamson is the current leading precedent regarding pensions and IPO’s) and Stephen Hunt.

It is apparent that despite the new pension rules contradicting the purpose of the Welfare Reforms and Pensions Act (1999) pursuant to which pensions were in the vast majority of cases, excluded from bankruptcy estates so as to prevent a bankrupt being a burden on the state, and despite having been challenged by the insolvency profession, the Treasury does not have any plans to carve out an exemption from the new rules for bankruptcy cases. The Chancellor announced yesterday that in the event the Conservatives win the next general election, he proposes to abolish the 55% rate of tax (widely known as the ‘death tax’) in all but a handful of cases.

The tax rate for the minority of pensions that will still attract tax, will be substantially reduced to 20%. I wonder whether this will lead to increasing numbers of people of working age being tempted to invest increasingly larger amounts into their pension funds in order to take advantage of the proposed tax saving on death, thereby passing the whole or substantially the whole of their pensions to their beneficiaries. In the context of bankruptcy and the new pension rules, the amount that the Court will deem to be necessary to maintain the bankrupt’s reasonable costs of living over an undefined period (and as a consequence the amount the Trustee is able to claim under an IPO) is likely to be determined through legal precedent in, I suspect, a small number of high profile, high value cases.

It may be that in the event of a successive Conservative government, the proposed tax cuts on pensions could lead to increasing numbers of bankruptcy cases where the debtor’s pension is the principal asset in the estate, which bizarrely is a return to a very similar position which applied to bankruptcy estates some 15 years ago.