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Uncrystallised personal pensions safe from creditors

14 October 2016. Published by Robert Morris, Partner

The Court of Appeal has resolved previously conflicting case law to confirm that a bankrupt cannot be obliged to crystallise his pension benefits in order to produce income to pay off creditors.

In Horton v Henry the Court of Appeal was asked to reconcile previously conflicting decisions by the High Court.  In one case from 2012 the Court concluded that a trustee in bankruptcy could require a bankrupt to trigger uncrystallised pension benefits, which the trustee could then use in order to pay creditors.  In several other cases, the Court had held that where a bankrupt had yet to trigger any payment from a pension, the pension would be ring-fenced and could not be used to pay creditors.

In this case, Mr Henry was 58 when he petitioned for his own bankruptcy.  He had no current need for income from his pension, which he wanted to preserve for his children after his death.  As such, his pension remained uncrystallised.  The official receiver's schedule of Mr Henry's creditors' claims amounted to some £6.5 million.

Mr Henry's trustee in bankruptcy applied for an income payments order requiring Mr Henry to pay into his estate (i) the amount of his pensions he was able to extract a tax free cash and (ii) further income payments that he could derive from his pensions.

The judge at first instance held Mr Henry's uncrystallised pension rights did not fall to be assessed as part of his income for the purposes of an application for an income payments order.

The Court of Appeal agreed.  They held that:

  • The legislation provides express protection against pensions falling within the assets that vested in a trustee in bankruptcy.
  • As a matter of construction, there was no basis for concluding that a bankrupt's contractual rights to draw down or crystallise his pension comes within the definition of "income" for the purposes of an income payment order.  The relevant legislation draws a clear distinction between rights under a pension and payments made from a pension.  Rights under a pension are expressly protected and excluded from a bankrupt's estate.  It would drive a coach and horses through the legislation if, despite these clear provisions, a trustee in bankruptcy could apply for an income payment order and require a bankrupt to convert his rights under a pension into payments that could then legitimately be considered as income.
  • The legislation's purpose is to draw a balance between, on the one hand, the State encouraging people to save for retirement (and so avoid undue burden on the state) and, on the other hand, the interests of creditors in receiving payment of their debts.  The legislation expressly allows a trustee to recover excessive pension contributions which unfairly prejudice the bankrupt's creditors.  Yet there was no basis for concluding that the court has power to require a bankrupt to exercise his pension options in any particular way.

The decision means that unless an individual makes excessive pension contributions (which, in any event, is made more difficult with each passing year given decreases in the annual contribution and lifetime allowances) that unfairly prejudice creditors, any uncrystallised pensions savings will remain untouchable.

This is a victory for the protection of pensions that seems slightly at odds with the current political and regulatory climate, in which freeing access to pensions (and reducing the tax benefits for encouraging pension savings) appears de rigueur.