It has always been a widely held belief that pension funds are protected from creditors in the event of bankruptcy but a recent court decision has thrown this into doubt and which could have significant implications in divorce cases where pension funds are a part of the assets.
In a recent ruling in the High Court in the case of Raithatha v Williamson the bankrupt member Mr Williamson had an uncrystallised pension fund worth £1 million. He had not taken any benefits and relied upon the protection from the Welfare Reform and Pensions Act 1999 that excludes uncrystallised pension benefits from being part of the bankrupt’s estate. Of course if Mr Williamson had crystallised his pension fund and taken benefits the trustee in bankruptcy, Mr Raithattha, could have applied for a general Income Payment Order that would have allowed the recovery of any income over and above that deemed necessary to provide the reasonable needs for Mr Williamson and his family.
Mr Raithatha was advised to issue an application against Mr Williamson under the Income Payment Order rules on the basis that Mr Williamson could take the benefits from his pension fund but had chosen not to (possibly to avoid some or all of the benefits being “lost” to his creditors!).
The Court concluded that there was no logical reason why there should be a distinction between a bankrupt who had taken pension benefits and one who could have taken benefits but had chosen (for whatever reason) not to do so.
The right to appeal has been given and we shall have to wait to see if the decision is challenged – however if it is not challenged or the decision is upheld this could have significant implications in divorce cases.
In divorce cases it is not unusual for one or even both parties to be placed in a difficult financial position and subsequent bankruptcy could definitely be a concern.
If that person is aged 55 or over and has an uncrystallised pension fund (possibly as a consequence of the divorce settlement) then this decision makes it very likely that creditors could successfully apply for a general Income Payment Order against the benefits that could be provided by that pension fund.
Earmarking has not been widely used as a means of using pension assets as a part of a divorce settlement due to the drawbacks (lack of control over timing and possible loss of benefits on death) but if there is any possibility of either party to the divorce being made bankrupt then perhaps this ruling makes earmarking a better proposition than pension splitting.