Pension proceeds in sequestration – income or vested asset?
By Steven Wood, Practice Support Specialist (Insolvency)
7 November 2019
The Sheriff at Glasgow has considered the nature of a pension payment made to a debtor from an approved pension arrangement. Steven Wood reviews the decision and its implications.
The Sheriff at Glasgow has issued his Judgment on whether, when a debtor elects to draw down the entire proceeds of his approved pension arrangement, this sum is income for the purposes of section 85(1) of the Bankruptcy (Scotland) Act 2016.
The case of Gary John Cook against the Accountant in Bankruptcy considered “a narrow but significant issue” where there was previously no relevant Scottish authority.
In making his Judgment the Sheriff considered the provisions of the Bankruptcy (Scotland) Act 2016 (“the 2016 Act”) and the Welfare Reform and Pensions Act 1999 (“the 1999 Act”), as well as common law.
Background
In September 2017, Mr Cook (the debtor) applied to the Accountant in Bankruptcy (AiB) for his own sequestration. The AiB was appointed Trustee, and in turn appointed Wylie & Bisset LLP (the agents) to act as agents for the AiB.
Prior to his sequestration the debtor had worked for Diageo Plc and had paid contributions to an occupational pension scheme. This was an approved pension arrangement within the meaning of sections 11(1) and 13 of the 1999 Act.
In January 2018, the debtor retired from his employment and was allowed access to his pension from the effective date of the termination of his employment, rather than waiting to his normal retirement age.
The debtor elected to draw the proceeds to which he was entitled in a single lump sum. The gross amount of his pension proceeds was £194,260 with the net sum, after deduction of PAYE income tax, being £130,342. The net sum was paid directly into the debtor’s bank account.
Thereafter, the agents sought to maintain that the proceeds of the pension vested in the AiB as Trustee and that the debtor should account to them for the pension proceeds in their entirety.
Arguments
Both the debtor and the AiB contended that the pension proceeds vested in them by virtue of the application of the relevant provisions of the 2016 Act, as modified by the 1999 Act. It was therefore necessary for the court to determine the nature of the sums in dispute, namely whether they constitute:
- an asset which vests in the applicant’s trustee in sequestration with effect from the date of sequestration;
- a non-vested contingent interest which vests in the applicant’s trustee as from the date of sequestration, subject to a contingency which may or may not be purified during what is known as “the relevant period”;
- an asset which was, as at the date of sequestration, neither a vesting asset nor a non-vested contingent asset, but which came to the debtor from an outside source during the relevant period i.e. acquirenda; or
- income of the debtor within the meaning of section 85 of the 2016 Act.
The Sheriff in his Judgment provides a helpful explanation of the distinction between what constitutes a non-vested contingent interest and what is acquirenda.
Decision
In making his decision the Sheriff references a variety of both English and Scottish case law, as well as citing the AiB’s own Notes for Guidance, HMRC’s treatment of the lump sum as income and the lack of meaningful distinction between the Scottish and English provisions.
Ultimately he concludes:
Treating any sum or sums drawn or paid from an approved pension arrangement as income reflects the wording of section 11(1) of the Welfare Reform and Pensions Act 1999 and section 85(1) of the Bankruptcy (Scotland) Act 2016 when set against the current options available to pension policy holders. This interpretation is purposeful and pragmatic. It avoids determining artificial thresholds (for example, that beyond a certain percentage of the fund, pension proceeds become an asset vesting in the trustee and/or that a withdrawal beyond a specific monetary figure becomes an asset vesting in the trustee) which would be an arbitrary and artificial exercise outwith statutory authority.
The Sheriff ruled that any payment or payments to a debtor from his or her approved pension arrangement is income which vests in the debtor for the purposes of section 85(1) of the Bankruptcy (Scotland) Act 2016 irrespective of the level of that sum or the regularity of the sums drawn or paid.
Personal bar
The parties agreed that, in view of his decision, the Sheriff did not require to deal with the issue of personal bar. However, the debtor requested that he expressed a view.
The Sheriff went on to quote from a letter sent by the agents to the debtor’s pension provider which explicitly stated that the Trustee had no interest in the policy due to its status as an approved occupational scheme.
The AiB agreed that the debtor relied on that correspondence in deciding to draw down the lump sum from his pension at the time when he did.
Based on these facts, the Sheriff concluded that, had he required to decide on this issue, he would have found in favour of the debtor as the letter from the agents was “succinct and unequivocal”.
Comment
The Judgment provides useful clarity on the nature of any payments received from non-vesting pension arrangements.
However, in relation to this specific case, it does not make clear whether the AiB will be entitled to vary the debtor contribution order (DCO) in place, taking account of the lump sum payment received by the debtor. Given that the Sheriff did not deal with personal bar, his Judgment does not appear to disallow that possibly; however, his comments place the AiB in an invidious position.
The Sheriff is clear that the letter issued by the agents to the debtor’s pension provider was crucial in the timing of the debtor deciding to draw down on his pension scheme. It would therefore seem inequitable for the AiB to fix a DCO to claim the pension proceeds by another means. However, against this the information provided was not factually incorrect. The provision of pension advice is a regulated activity and the AiB as Trustee (and hence their agents also) are not authorised to give pensions advice. It could be argued that the debtor should have sought his own independent advice prior to drawing down the pension lump sum. The debtor’s creditors may therefore have some questions for the AiB as Trustee if the decision is taken not to pursue a variation of the DCO in order to ingather the pension funds.
Whatever the outcome in this case, Trustees should take particular care when issuing letters concerning pension schemes. Any declaration that no interest is held should be heavily caveated to make explicitly clear that lack of interest does not extend to any payments drawn down from the scheme, which will be treated as income and assessed accordingly for the purposes of a DCO. In doing so they must also tread the fine line that they do not stray into the regulated activity of pension advice.