The position of pensions in Bankruptcy proceedings has been clear throughout the recession, pensions remain outside of the Bankruptcy estate and available for a Trustee in Bankruptcy in only one of two ways:
1. Identifying excessive pension contributions in the period preceeding Bankruptcy; or
2. The Bankrupt becomes entitled to their lump sum during their 12 month period of Bankruptcy.
As a result, unless a borrower is of pensionable age (65), and hasn’t already drawn their lump sum then pensions are often excluded from discussions with creditors.
However, recent changes to pensions legislation in April 2015 have fundamentally changed two aspects of the old regime:
1. Borrowers now have ‘flexible access’ to pensions from age 55; and
2. Pension draw down restrictions are abolished i.e. borrowers can now draw down up to 100% of their pension by way of a lump sum.
Prior to April 2015, an individual was entitled to drawdown 25% of their personal pension as a tax free lump sum upon reaching the pensionable age, with the remaining 75% to be used to provide an income – normally by way of an annuity or setting up a pension drawdown.
Following Government changes which came into effect on 06 April 2015, an individual is entitled to drawdown their pension with no restriction i.e. they can withdraw their whole pension as a lump sum, if desired, once they have reached the normal minimum pension age – currently 55 (or earlier if in ill health or if the individual has a protected retirement age).
The first 25% will still be tax free, with the remaining 75% subject to tax at the individual’s marginal income tax rate.
Impact in Insolvency
In an insolvency scenario, these changes present borrowers with access to funds which may assist in discussions with creditors outside of Bankruptcy.
If a borrower is over 55 with personal indebtedness, then the ability to drawdown all of their pension as one lump sum, or stage over a period in order to minimise their tax liability, may present the borrower with an opportunity to reach a compromise with his / her creditors. It should be noted that pensions are intended to provide an income for retirement and so it is important for borrowers to take professional advice before making any such decision.
The flexibility afforded to the borrower from such Government changes may also allow for increased application in an Individual Voluntary Arrangement (“IVA”), both as an alternative to, or as an exit mechanism out of, Bankruptcy. Drawing down an initial lump sum and staggering further drawdowns over a period, could present a borrower with an ability to provide his / her creditors with an enhanced IVA proposal. Furthermore, drawing down their entire pension pot (albeit with additional tax implications) may allow the borrower to agree a shortened IVA term with his / her creditors. It is also worth noting that any borrower not of pensionable age but in the process of proposing an IVA (and is likely to reach pensionable age during the term of the proposed IVA) may be able to offer additional funds into the Arrangement once they have reached pensionable age, in order to achieve acceptance from the body of creditors.
The recent changes also have implications in Bankruptcy and the ability of the Trustee to seek an Income Payments Order (“IPO”) against the Bankrupt’s pension entitlements for the benefit of his / her creditors. The application in a formal Bankruptcy scenario is considered in recent case law, namely Raithatha v Williamson  and Horton v Henry .
Contrary to the decision of Raithatha v Williamson , in Horton v Henry  the Judge held that a Bankrupt only becomes entitled to a payment under his pension after there are definite amounts which have become contractually payabe. An IPO attaches to a payment to which the Bankrupt is entitled. However, until the Bankrupt has exercised the option to choose between the various different ways in which pension benefits could be taken, the Bankrupt was not entitled to any payment at all against which an IPO could be made.
Therefore, unless a Bankrupt has already agreed his / her pension drawdown method, a Trustee cannot force a Bankrupt to do so, thereby preventing a possible IPO from such pension entitlements for the benefit of the Bankrupt’s creditors. If, however, a Bankrupt’s pension is already in payment, a Trustee in Bankruptcy could seek an IPO in appropriate cases.
This judgment of Horton v Henry  is subject to appeal, with a hearing in the Court of Appeal now delayed until January 2016.
Whilst this position in Bankruptcy remains unclear, it is again worth stressing the considerations outside of Bankruptcy for both borrowers and creditors alike.
For those borrowers aged 55 with a pension fund, there is now a route to access substantial funds that could be provided to creditors in order to avoid potential Bankruptcy.