One of the great reasons to save into a pension has long been the idea that all pension pots are fully protected should you go bankrupt. All your other assets might be up for grabs, but your pension stays yours.
Whatever the tax benefits, this protection has always been a draw for those who take risks in other areas of their financial life. But it’s not something to be complacent about: it hasn’t been a given in the past, and it certainly isn’t one now.
The generally accepted principle on pensions and bankruptcy has been pretty simple: if you haven’t started drawing your pension (you haven’t ‘crystallised’ it) it is 100% safe. If you have, the income you are receiving from it, and, of course, any lump sum you have already taken and not spent, are subject to the usual rules of bankruptcy – the trustees get to take as much as they can to pay down your debts – until you are discharged. So far, so sensible.
But this all gets more complicated in April. The fact that people have always been able to take 25% of their fund tax fee at any time after the age of 55 has given rise to cases in which bankruptcy trustees have tried to force drawdown of the lump sum from even uncrystallised pensions “for the benefit of creditors” (or more often, lawyers). After all, the lawyers say, the lump sum is effectively an asset of the bankrupt and all assets can be grabbed by bankruptcy trustees.
This principle was established by judge in the 2012 case of Raithatha v Williamson who decided that “a bankrupt does have an entitlement to a payment under a pension scheme not merely where the scheme is in payment of benefit but also where, under the rules of the scheme, he would be entitled to payment merely by asking for payment”. The key point here – according to this judge – is that if you can get the money simply by asking for it, it is a current and accessible asset and therefore one that must be handed over.
Translate that decision across to the new rules and you will see the problem, says James Nicholls of Gunnercooke. If any pensioner can withdraw any amount from their pension at any time simply by asking for it, is all the money in a pension, whether crystallised or not, now at risk from bankruptcy?
All is not lost here. Another test case late last year came to the opposite conclusion. In Horton vs Henry, the judge decided that it wasn’t so simple.
This judge recognised that the bankrupt was entitled to take money from his pension, but also noted that it was not so simple as just asking. Instead, he noted that “uncrystallised pensions envisage further steps beyond merely asking for payment. The pension holder has to make elections among a range of potential benefits before he is entitled to receive any specific payment or payments”.
He concluded that the bankrupt was not entitled to payment under his pensions “merely by asking for payment” and as a result refused the trustees application. The case has now gone to appeal and should be heard in the next few months.
Barrister Peter Hamilton, of moneymatterslegal.co.uk, seems to think that the court of appeal will prefer the second decision. Maybe it will, but for now the risk that an uncrystallised pension can be grabbed (either for its lump sum or, conceivably, in its entirety) remains a serious one.
However it is also worth noting that a crystallised pension is even more at risk. If you have already gone into drawdown, you really can get any amount of your pension simply by asking for it, something that both judges in the cases have suggested puts your money at risk.
There will be a relevant bankruptcy soon (the new rules that allow people to withdraw at will come in April) and then there will be a test case on this. If I was the bankrupt, I wouldn’t be hopeful of a comfortable old age.