UK Pensions Briefing: Hands off my pension! How safe are judgment debtors’ and bankrupts’ pensions from creditors?

Introduction

In recent years, there have been several cases in which a pension saver has been compelled by the Court to access their pension fund in order to pay a creditor. The Courts have now established the principle that debtors cannot protect assets in pension funds when they have a right to make withdrawals which could be used to satisfy a judgment debt. This briefing looks at how the common law is developing where a pension member is either a bankrupt or a judgment debtor, and how their pension savings may be applied to satisfy debts.

The law against forfeiture

Generally, pensions law prohibits a member’s right to a pension being assigned, commuted, surrendered, forfeited or made subject to a lien or set-off. Any agreement making such an arrangement is unenforceable and a Court cannot make such an order. The law deals specifically with the inalienability of rights to a pension under an occupational scheme. However, there are no equivalent provisions for rights under a personal pension plan, although the wording of the scheme policy may prevent such pension rights from being assigned.

There are exceptions to this overarching rule of inalienability, and there are several specific circumstances in which benefits may legitimately be forfeited. For instance, the scheme rules often allow a member to surrender part or all of their benefit in order to provide a pension for a surviving spouse following the member’s death. Equally, all or part of the pension entitlement may be commuted to a lump sum payable either in retirement or in circumstances of ill-health. A charge, lien or set-off against benefits may be applied by an employer in cases of the member’s criminal, negligent or fraudulent behaviour. In addition, the scheme trustees can often apply a set-off against a member’s future benefits in order to recoup an overpayment.

Below, we consider whether a member’s benefits can be accessed by their creditors in bankruptcy, or by a creditor to whom they owe a judgment debt. Can a scheme member resist drawing his pension benefits in an attempt to avoid paying a debt? 

The position where the member is bankrupt

Generally, benefits which have accrued in a personal or occupational pension scheme do not fall into the estate which the trustee in bankruptcy will use to satisfy the bankrupt member’s debts. However, where the bankrupt receives pension payments as an income at any point between the date of the bankruptcy order and its discharge, an application may be made to Court by the trustee in bankruptcy for an income payments order (IPO). 

What, though, is the position where entitlement under a scheme has arisen but the pension member has not exercised their right to start drawing their pension (whether or not in a deliberate attempt to deny payment to their creditor)? This was considered in Raiththa v Williamson in 2012, where the High Court held that the trustee in bankruptcy could apply for an IPO in respect of the member’s personal pension, and then apply the monies for their creditors’ benefit. Leave to appeal was granted, but the parties reached a settlement.

The decision was considered by the High Court in Horton v Henry in 2014, in similar circumstances. However, the Court on this occasion declined to follow Raithatha, concluding that it had been wrongly decided. In Horton, the Court held that a bankrupt’s unexercised right to draw their pension was not income to which they were entitled and it refused to make an IPO. Until Mr Henry, the bankrupt, had made the necessary decision and application, the pension payments were neither certain nor contractually payable. Neither did the trustee in bankruptcy have the right to make those decisions on behalf of the bankrupt. Did this mean that a bankrupt could shelter large amounts in pension savings without being obliged to make any withdrawals to pay creditors?

Horton v Henry progressed to the Court of Appeal, which upheld the High Court decision and ruled that a trustee in bankruptcy cannot compel a bankrupt to draw down their unelected pension to satisfy an IPO. Only pensions in payment are subject to the IPO regime, and the Court of Appeal decision has brought welcome clarity in this area.

Can a bankrupt make excessive pension contributions to shield wealth from creditors

Where an individual makes excessive contributions to a registered pension arrangement, a trustee in bankruptcy can apply to court for an order for their recovery. In making an order to restore the position to what it would have been had those contributions not been made, the court will consider:

• Whether any of the contributions were made for the purpose of putting assets beyond the reach of creditors. Dishonesty need not be established.
• Whether the contributions were excessive in view of the member’s circumstances at the time they were made. 

“Excessive” has not been defined but is a question of fact for the judge, and for the trustee in bankruptcy to prove on the balance of probabilities. The Court will consider such issues as the source of the money and the individual’s ability to make the contribution payment.

Is a pension safe from creditors when the debtor is not bankrupt?

The situation is different where a pension scheme member is a judgment debtor, but is not actually bankrupt. Unlike sums held in bank accounts, pensions have generally been considered outside the scope of third party debt orders, because they do not constitute debts due and payable to the judgment debtor. In Blight & others v Brewster in 2012, the High Court held that its jurisdiction extends to granting an injunction or appointing a receiver to help the enforcement of a judgment, and the overriding consideration was the demands of justice. 

The solution adopted in Blight v Brewster was forcibly to delegate powers held by the judgment debtor to the claimants’ solicitors, enabling them to draw down the fund. The monies were then used to repay the creditor under a third party debt order. 

An interim third party debt order freezes the assets concerned and prevents the debtor having access to the money until the court decides whether or not it should be paid to the creditor to satisfy the judgment debt. Following the final third party debt order, the third party (here, the trustees of the pension scheme) must make payment to the judgment creditor and not to the scheme member. The debt owed by the scheme to the member is then extinguished on payment to the judgment creditor.

This contrasts with the statutory protection afforded to pension funds on bankruptcy. In Blight, the member was entitled to draw his pension but had chosen not to. The Court ordered the debtor member to delegate the power of election (to receive the pension) to the claimant’s solicitor, with the sum payable from the pension fund then being subject to a third party debt order. Where a debtor fails to pay their debts and does not actually go bankrupt, they will not be permitted by the Courts to hide their assets in pension funds when they have a right to withdraw them.

Does a member’s enhanced protection affect a creditor’s ability to access a pension?

In Bacci v Green in 2022, the member’s creditors were seeking to enforce a judgment debt which had arisen from fraud against a discharged bankrupt. As the member’s debts were incurred in respect of fraud, his bankruptcy did not extinguish them. Although most of his assets had fallen into his estate in bankruptcy, his pension rights were excluded.  The claimants sought to enforce their judgment against the debtor’s rights in the scheme. This required a two-step process: first the revocation of the member’s enhanced protection, followed by an enforced election to withdraw a lump sum.

The Court of Appeal in Bacci upheld the High Court’s decision that a debtor could be compelled to revoke the enhanced protection he had claimed in respect of his pension scheme and then seek the maximum pension commencement lump sum and lifetime allowance excess lump sum to which he was then entitled. The debtor (Green) argued that this was an impermissible extension of the Blight v Brewster decision, as the power to terminate enhanced protection was not property. The Court of Appeal’s view was that the right to revoke enhanced protection did not have to be either “property” or “tantamount to ownership” for the order to be made, and that the debtor could be directed to revoke his enhanced protection, or to delegate his right to do so. The overriding public policy was that fraudsters should not prosper.

Can debtors be compelled to withdraw their pensions where there is no fraud?

Subsequently, the rulings in Blight and Bacci have been applied in both Lindsay v O’Loughnane and Brake and another v Guy and others, which are both 2022 cases. In Lindsay, the judgment debtor was required to give written notice to each of his three personal pension providers requesting that they draw down the entire fund value on his normal retirement date and pay the sums direct to the claimant. In Guy, the debtor was required to drawdown the remainder of his pension entitlement from his personal pension arrangement.  In the event that the debtor failed to draw down his pension, or to pay the proceeds to his creditors, the Court gave the claimants’ solicitors the power to do so.

The judge in Guy considered there to be strong public policy reasons why debtors should not be allowed to hide their assets in pension funds when they had a right to withdraw monies needed to pay their creditors. He did not accept that it was only where fraud caused the judgment debtor's liability that such an injunction could be granted.