Although this article is written about and for those in the UK, I think it might be a good warning for all about the potential we all face in the current world economy where our security might be as fleeting as a change in the law.
Debtors Face Having Pensions Raided
by Chrissy Hoey
As the UK continues to struggle with its finances and the economy sinks into a triple dip recession, the number of individuals facing Bankruptcy is higher than ever.
However, those who have managed to build up a nest egg for their retirement have been able to protect their future from the hands of their creditors, even if they are stripped of all their other assets….until now.
A new ruling means that individuals who are declared bankrupt could be forced to hand over their pension fund in order to settle their debts.
The High Court case of Raithatha V Williamson has sent experts into a spin, because it challenges the way pension funds have traditionally been treated by Bankruptcy law. The Court decided that the Trustee in Bankruptcy could insist on taking money from the individual’s pension nest egg.
But the ruling is not a blanket agreement and only those aged over 55 could be at risk. Under some pension schemes, individuals are eligible to draw their pension once they reach age 55 and it is these funds which Bankruptcy practitioners will try and nab.
The High Court ruling could still yet be appealed and is yet to have far-reaching consequences, but if upheld, it could ultimately, lead to a change in the law.
Retirement funds had been protected by the Welfare Reform and Pensions Act, meaning that even if an individual was made bankrupt, the money to see them through their later years could not be raided. However, the High Court has deemed that once an individual reaches age 55, they could potentially receive an income from the pension, which in turn, makes it recoverable under Bankruptcy rules. The principle applies regardless of whether the person is actually in receipt of a pension; it is the potential eligibility which is the critical factor.
If the ruling survives a legal challenge, any change in the law is fraught with difficulties…
To start with, groups have already claimed that the ruling is discriminatory, leaving those in their later years facing tougher action than younger individuals made bankrupt.
The lawyer, Damon Watt, for the bankrupt individual in this case, Williamson, said that the impact on older individuals would be ‘disproportionately adverse,’ whilst younger defendants would not be ‘deprived’ of what he described as ‘an essential element’ from their pension.
But the discrepancy between how bankrupts of different ages are treated isn’t the only potential problem that the new ruling could cause.
Private pension schemes are written in different ways and, ultimately, the trustees of the scheme have the say about what happens. In some cases, a request for early retirement can be declined, or only granted at the Trustees’ discretion, leaving them facing the difficult decision about whether to hand over the money for creditors to gobble up.
If the Trustees opt to grant the request from the creditors to pay out the pension early, solely for the purpose of paying off more of the debts, they could face complaints from disgruntled scheme members, claiming they have not had their best interests at heart.
However, many of these types of plans are linked to an employer and have far more rules than other types of private pension. Experts have suggested that whilst this a ‘grey area’ in view of the ruling, in reality, courts could not force discretion to be exercised in a way to suit creditors. But in order to circumvent schemes simply slapping a discretionary label on everything, new laws may decree than in the event of Bankruptcy, discretion no longer applies.
The presiding judge, Mr Justice Livesey QC, denied that the decision would lead to an unfair prejudice and, in fact, argued that the current rules are biased.
In his ruling, Mr Justice Livesey QC questioned why those who were entitled to receive their pension but had not yet chosen to draw it, should be treated any differently from those who were already in receipt of the money. He said that individuals who were declared as bankrupt could deliberately delay taking their pension until after they were discharged, thereby robbing creditors of money, whilst those who had opted to start receiving an income, were forced to hand it over.
The arguments are set to continue for some time but the case is being monitored avidly by those it affects. And regardless of which way the final judgement falls, the implications are likely to be wide-ranging for both those made bankrupt and the debt industry.
Chrissy Hoey is with Baines and Ernst, a credit management company in the UK.