Budget 2014 & changes to pension rules implication for Trustees in Bankruptcy

An IPO is an order under which a bankrupt is required to pay any excess income to the TIB for a period of up to three years. Prior to this case, it was generally accepted that a bankrupt’s pension fund was essentially beyond the reach of the TIB unless it could be shown that the bankrupt had made excessive contributions to the pension fund in the period preceding bankruptcy.

In this case the Court decided that an IPO could be made in respect of an undrawn pension as the bankrupt had an entitlement to the funds if he/she could receive the funds simply by asking for them.

Following the case, a TIB can compel a bankrupt to take his/her pension benefits thereby giving the TIB access to the 25% tax free lump sum and annuity income.

In the 2014 budget, the Chancellor announced changes to pension rules whereby with effect from April 2015, a pensioner no longer needs to purchase an annuity but can instead draw down up to the entire pension fund in cash if they so desire.

This leads to an interesting scenario. Consider a debtor of pensionable age made bankrupt after the enactment of the new pension rules. Will the TIB be entitled to compel the bankrupt to draw his/ her entire pension fund for the benefit of creditors? Will the Court allow a TIB to realise an entire pension fund thereby leaving the debtor without an income for his or her retirement? I suspect that the Court will look to balance the interests of the bankrupt and the creditors and may restrict the TIB to a proportion of the pension fund. If the Court restricts the TIB, how will the Court calculate the proportion of the fund to be realised in the bankruptcy?

Once the new rules are enacted, these issues are bound to be brought up in legal cases where there are significant pension fund assets. Watch this space!