In the case of Brake v Guy the High Court has made a third party debt order requiring the trustee of a SIPP to pay the remainder of the member's pension fund to a creditor of the member. 

The court order also required the member to execute documents to draw down the remainder of his pension fund.

The case arose out of litigation in which an order for costs was made against Mr and Mrs Brake requiring them to make an interim payment of £70,000 on account by a specified date.  The other parties to the litigation (referred to in the judgment as the "Guy Parties") asked the court to make a third party debt order (TPDO) against the trustee of Mr Brake's SIPP.  

The rules governing TPDOs allow the courts to make an order against a third party who owes a debt to a judgment debtor whereby the court orders the third party to pay an amount directly to the debtor's creditor. 

Issues decided by the court

Was there a debt owed by the SIPP trustee to the member?

Mr Brake had already opted for flexi-access drawdown under the SIPP and taken the maximum tax free lump sum.  Looking at the applicable scheme rules and T&Cs, the court found that there were no grounds on which the scheme provider could refuse to allow Mr Brake to draw down the remainder of his fund in benefit payments.  The judge said that if the fund had been held in cash, it would have been a debt due to him (nothwithstanding that the funds would only have been paid to him on request).  Equally, the fact that the exact amount payable would not be known until tax and costs had been deducted did not stop the amount being a debt.  However, the fact that the pension fund was invested rather than held in cash meant that it was not currently a debt.  While the funds were invested, it would not be appropriate to make a TPDO against the trustee without making further orders to address the fact that the funds were currently invested.

Would the scheme administrator also have to be a party to any TPDO?

The SIPP in question had been established on a "bare trustee" model under which the only function of the SIPP's trustee was to hold the fund and deal with it as directed by the scheme administrator.  The judge considered whether any TPDO would need to be made against the scheme administrator as well as the trustee.  The judge held this would not be necessary, as there were no longer any relevant discretions which the scheme administrator could exercise under the rules to prevent the member obtaining access to the funds.

Was it inappropriate to require the member to withdraw funds from a pension scheme to pay a debt not caused by fraud?

The judge noted that previous case law involving members being ordered to draw funds from their pension scheme in order to pay a debt were cases where the member had committed fraud, whereas there was no suggestion in the present case that Mr Brake's debt had arisen as a result of fraud.  However, the judge held that the question of whether or not a debt had arisen through fraud was not relevant to the principle that "debtors should not be allowed to hide their assets in pension funds".

Was it relevant that withdrawing the full fund might trigger a significant tax charge?

The judge said that the fact that any drawdown by Mr Brake would be subject to tax was in itself "of minor importance", though he did suggest that it might not be appropriate for the court to make an order if the tax liability would be so great that there would be no real benefit to the creditor.

What order did the judge make?

The judge made an order directing that:

  • the Guy Parties consult the SIPP Trustee regarding the form of documentation and information which it required in order for Mr Brake to exercise his right to benefits under the scheme;
  • Mr Brake provide to the Guy Parties all information reasonably required by the SIPP trustee which it was in Mr Brake's power to provide;
  • the Guy Parties draft the relevant documentation, submitting it to Mr Brake for comments.  Having considered any such comments, the Guy Parties should settle the documentation;
  • Mr Brake must then execute the documentation forthwith and return it to the Guy Parties for onward transmission to the SIPP trustee.  If Mr Brake failed to do so, the judge made an order that a partner in the firm of solicitors acting for the Guy Parties was authorised to execute it on Mr Brake's behalf;
  • upon implementation of Mr Brake's rights under the pension scheme, the SIPP trustee must, after deduction of any required tax and fees, pay to the Guy Parties the sum owed to them by Mr Brake under the costs order, or all remaining sums in Mr Brake's pension fund if less.
Our thoughts

In this case the court held that the terms of the scheme meant that the scheme administrator had no discretion which would allow it to stop the scheme trustee from paying out drawdown income on a request from a member.  Scheme trustees and providers who are made party to court proceedings involving the enforcement of debts against the scheme should ensure that they are completely clear as to whether they have any discretion under the scheme rules to refuse to action a member's instructions.  If there is any doubt on this issue, it may well be sensible for the provider to ensure that the issue is resolved by the court.

Jade Murray

Jade Murray

Partner, Pensions
United Kingdom

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