The coalition government's plans to allow workers greater freedom to access their pension pots could have an unintended consequence for those declared bankrupt after their 52nd birthday. By Robin Davis, Consultant and employment specialist at Bray & Krais Solicitors.

This is because of a little-known case called Raithatha v Williamson decided in 2012. The court held in that case that a trustee in bankruptcy could apply for an Income Payments Order in respect of a bankrupt’s personal pension arrangements where the bankrupt was entitled to draw his pension but had chosen not to. Although the court agreed that the right to draw his pension fell outside the bankruptcy estate, it held that the power to issue an Income Payments Order could be exercised despite this. The bankrupt's unexercised right to draw his pension represented income which could be the subject of an Income Payments Order and the bankrupt could be compelled to draw his pension for the benefit of his creditors. This meant that 25 percent of the lump sum that was otherwise payable to the bankrupt, became available to his trustee in bankruptcy for the benefit of his creditors.

This decision came as a surprise to insolvency practitioners as up until that case it was widely believed that an Income Payments Order could not be made in these circumstances. The situation is about to become even worse for bankrupts. The new pension proposals coming into force next April, will give a worker a right to withdraw 100 percent of their pension pot. So, for so long as the decision in the Raithatha case remains the law, workers who become bankrupt could find the whole of their pension pot being subject to an Income Payments Order and not just 25 percent as now. This could affect all workers over 52 years of age as trustees in bankruptcy have a right to make claims in respect of all income arising during the period of 3 years after the date of a bankruptcy order which brings into scope a bankrupt's right to their pension pot at 55.

Many insolvency practitioners consider the Raithatha case to be wrongly decided but there is no pending appeal against it (an appeal was lodged but withdrawn after the parties settled) and, until overturned, it will continue to be the law. It remains to be seen whether the coalition government will make statutory provision for the situation to be restored to its current position – that is assuming it has the will to do so.