The Court of Appeal in the case of Horton v Henry [2016] EWCA Civ 989 had to consider; Can you use your pension to pay off debt?
Can you use your pension to pay off debt?
In this case, the respondent husband had made himself bankrupt on a bankruptcy application (petition) issued by him. A trustee in bankruptcy was appointed and the assets of the respondent husband on the date of the bankruptcy included four pensions from which the respondent could draw down a lump sum payment and or derive an income. The respondent elected not to do so and was supported by the reported generosity of his wife and then immediate family.
Ultimately, the day before then the respondent would have been discharged from his bankruptcy, the appellant filed an application for an income payments order requiring the respondent husband to pay (i) the tax-free lump sum that the respondent was entitled to draw down from the four pensions he had and (ii) a further payment of any monthly or periodic income that the respondent might have obtained from those pensions.
Lord Justice Gloster summarised the issue then before the Court of Appeal as follows:
“does a pension entitlement in respect of which a bankrupt has a present right to elect to draw down payment (but has not yet exercised) fall to be included in the assessment of his income“?
Upon consideration of the issue, the Court of Appeal held that such pension rights did not fall to be included as income. The following reasons were given:
- The Insolvency Act and pension legislation had explicitly excluded pension rights from the estate of a bankrupt. Parliament had decided to draw a balance between, on the one hand, the interests of the State in encouraging people to save for their retirement, and, on the other, the interests in creditors receiving payment of their debts.
- A trustee could not require a bankrupt to take steps to obtain property that was excluded from their estate, and convert it into income receivable by him, so that it could be subject to an income payments order. A trustee could not require a bankrupt to work so as to receive a salary, nor to request a payment from a discretionary trust of which he was a beneficiary.
- If a trustee were able to compel the bankrupt to draw on his pension, then the courts would have to decide both the amount and manner of the draw down. The absence of criteria in the Insolvency Act informing the court as to how it should make such a determination was a “formidable obstacle to the trustee’s arguments”.
- As a matter of construction of section 310 of the Insolvency Act, there was no basis for concluding that a bankrupt’s contractual rights to draw down or crystalise his pension come within the definition of “income of the bankrupt”.
- The Insolvency Act as well as the relevant provisions of the Pensions Act 1995 and the Welfare Reform and Pensions Act 1999, drew a clear distinction between rights under a pension scheme and payments under such a scheme.
So, can you use your pension to pay off debt? In short, the Court of Appeal determined that a trustee in bankruptcy cannot compel a bankrupt to draw down payment from his pension entitlement, if he has not yet elected to do so. Such pension rights could not be included as part of the bankrupt’s in come.
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