Eddie Hunt, of Shrewsbury based insolvency practioners Burton Sweet, asks whether pensions are safe in bankruptcy

Under the provisions of the Welfare Reform and Pensions Act 1999 section 11, where a bankruptcy order is made against a person on a petition presented after the act came into force, any rights of his, under an approved pension arrangement, are excluded from his estate (in bankruptcy). That seems straightforward enough. 

However, in the case of Raithatha v Williamson the High Court has managed to complicate matters, at least for those who are made bankrupt at a time when they can elect to draw their pension from their own scheme. As with many schemes, this one provided that the minimum age at which one can be taken is 55 years. The bankrupt in this case was 59. He had disclosed that he had a pension scheme worth over £900,000. He had not elected to take his pension as he was then able to work. 

The trustee in bankruptcy had obtained an injunction preventing the bankrupt exercising any option over the pension scheme thereby preventing him either drawing a lump sum or more likely taking the whole fund to buy an annuity. The trustee was after the lump sum which was likely to be 25% of the fund. 

The court rejected the submission on the part of the bankrupt that amongst the bundle of rights vested in the bankrupt was the right to decide when and how to exercise the various options under the pension scheme. To understand the full rationale one needs to read the judgement in full but the effect is that anyone over the age of 55 who is made bankrupt may well lose up to 25% of their pension pot if they have not exercised the right to buy an annuity before being made bankrupt.

That of course is the problem i.e. that if the annuity commences before bankruptcy then for a period of three years part or all of it may be taken under an income payments order but at least the lump sum is producing an annuity for all the years after. 

It does seem odd to the writer, now aged 62 and not (yet) bankrupt, that at a time of life when there is little opportunity to make good the loss to ones pension fund, a proportion of the fund is lost whereas a 53 year old bankrupt is untroubled by this decision. Why should there be such a fine margin or distinction? Furthermore, the Welfare Reform and Pensions Act was brought in because Parliament realised that the case of Llandau, in 1996, which established that everyone had got the law wrong for the best part of 50 years, would result in a steady increase in aged and impoverished debtors who would be claiming social security at the expense of the public purse. It makes this decision seem to the writer inconsistent with the intention of Parliament. 

So the message is that all is not what it appears to be under the Welfare Reform and pensions Act 1999!