Pensions safe from bankruptcy

Glasgow Office Building
david-menzies By David Menzies, ICAS Director of Insolvency

7 October 2016

The Court of Appeal has clarified that bankrupts cannot be forced to draw down on pensions and that pensions cannot be taken into account when determining surplus income payable by a debtor into their bankruptcy.

The Court of Appeal has issued their long awaited judgement in the case of Horton v Henry, clarifying that Trustees cannot access undrawn pension pots and bring them into the bankrupt estate for the benefit of creditors.


The law governing access to a bankrupt’s pension by Trustees in Bankruptcy (‘Trustee’) was cast into uncertainty in recent years by two contradictory court rulings. Following the government’s 2015 pension reforms which lifted many of the restrictions governing how and when pensions can be taken, the stakes have been raised for both Trustees and debtors.

Steps were taken to protect pensions from the reach of the Trustees through the Welfare Reform and Pensions Act 1999 (WRPA) on the basis that bankrupts should have the ability to support themselves in old age. This protection was effectively removed after the judge in Raithatha v Williamson [2012] EWHC 909 (Ch) allowed the Trustees to compel the bankrupt to elect to draw down his pension. However, two years later, the judge in Horton v Henry [2014] EWHC 4209 (Ch) contradicted the Raithatha ruling, and ruled that Trustees could not compel a bankrupt to crystallise his pension.

The two contradictory cases

In Raithatha, the debtor had reached pensionable age but had elected not to draw down his pension as he continued to work. His pension was worth up to £43,000 a year, with a lump sum of £250,000, and the Trustees applied for an Income Payments Order (IPO) to enable them to receive any income deemed in excess of ‘reasonable domestic needs’ for a maximum of three years. The court decided that the Trustees could compel the debtor to make an election, but recognised that the right to elect did not automatically pass to the Trustees. The court considered that it was unfair for someone already drawing their pension to be subject to insolvency rules but not for someone who qualified for their pension but had not yet elected to take it. Although the debtor was given leave to appeal, the appeal was never lodged as a settlement was reached between the Trustees and the debtor on confidential terms.

In Horton, the Trustees tried to compel the debtor to crystalise his pensions, using Raithatha as the basis of their request. The debtor did not wish to crystalise his pension policies. The court held in this case that there was a difference between pensions that were being paid, and those that were not, and that a bankrupt’s unexercised rights to draw his pension did not represent income to which the bankrupt was entitled. As a consequence, the pensions therefore fell outside of the bankrupt’s estate. Unless the bankrupt triggered the pension payments voluntarily, they were neither certain or contractually payable. It was held that there was no power to require the bankrupt to elect in any particular way.

The contradictory rulings led to a large degree of confusion and Horton was given leave to appeal.

Appeal outcome

The Court of Appeal has refused the appeal and the approach adopted in Horton v Henry is sustained.

In making her judgement Lady Justice Gloster, which was agreed by Lord Justice McFarlane and Sir Stanley Burnton, concluded that the statutory interpretation of section 310(7) of the Insolvency Act 1986 is that the phrase “payment in the nature of income…to which he from time to time becomes entitled” means in relation to pensions which are in payment and not to any wider right of payment that may come into entitlement.

Lady Justice Gloster also commented that “I cannot accept the reasoning of Mr Bernard Livesey QC…in Raithatha. It seems to me that he failed to appreciate the effect of the fundamental changes brought about by section 11 of the WRPA with regards to the protection of rights under private pension plans in bankruptcy or the alignment of such protection to that which had previously been afforded to rights under occupational pension schemes.”

This will no doubt be of significant relief to debtors, especially those who are approaching or have passed the age of 55 where under the new pension freedom provisions the pensions can be more readily accessed.

The decision ensures that the earlier policy intent of Parliament to protect pension rights falling within the bankrupt estate is retained.


  • Insolvency
  • Pensions

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