Is the drawdown of an approved pension agreement considered "income"?

Sheriff McCormick at Glasgow Sheriff Court has been asked to rule on this specific point in the recent case of Gary John Cook v The Accountant in Bankruptcy [2019] SC GLA 82, which he answered in the affirmative.

This is of particular relevance for trustees in sequestration when the debtor has paid into a pension scheme and is intending to apply for a drawdown of the proceeds from that scheme, following the appointment of the trustee.

The facts are fairly straightforward:

• On 11 September 2017, the AiB sequestrated Mr Cook's estate (on Mr Cook's application). In terms of section 78 of the Bankruptcy (Scotland) Act 2016 (the "2016 Act"), the whole of Mr Cook's estate vested in his Trustee as at that date. 
  
  
• Mr Cook was an employee of Diageo plc and had contributed to an occupational pension scheme (which was an approved pension arrangement, as defined in the Welfare Reform and Pensions Act 1999 (the "1999 Act")) over the course of his employment. 
  
  
• Mr Cook retired from Diageo on 31 January 2018 and was permitted to access his pension at that date which he drew out in a single lump sum.
  
  
• The Trustee argued that the proceeds of the pension vested in the trustee and that Mr Cook had to account for the total amount. Mr Cook argued that the proceeds should properly be considered "income" and therefore was prevented from vesting in the Trustee, in terms of section 85(1) of the 2016 Act.

There followed an interesting discussion around non-vesting contingent assets and acquirenda but ultimately, the following points were held important by Sheriff McCormick in coming to the decision that the sum was rightly considered income and therefore did not vest in the Trustee:

• Whilst there were no Scottish authorities provided on the point, the English authorities cited showed that there was an acceptance that funds drawn from a pension are treated as income. The Sheriff agreed with this proposition and held that the Scottish legislation made no distinction that would change this view.
  
  
• Whilst the Sheriff held that it was not the source of proceeds which would determine the case, it was whether any (or all) payments from the pension scheme were treated as income. His view was that fundamentally, the purpose of the pension arrangement was to safeguard funds for the individual's future, how many payments the individual wanted it paid in was irrelevant. 
  
  
• It was undisputed that an approved pension arrangement does not vest in the Trustee (in terms of sections 11 and 13 of the 1999 Act) – the Sheriff took that a step further and held that the proceeds deriving from such an arrangement do not vest in the Trustee either.
  
  
• A distinction that was drawn (in reference to the unreported case of Macdonald v KPMG LLP) was the situation where the proceeds of the approved pension scheme were already held in the individual's bank account, prior to their sequestration. The basis for such distinction was that the individual in that case only had a right to demand payment from the bank where his accounts were held; rather than against the pension scheme – in stark contrast to the right of Mr Cook who held a right against the pension provider.
  
  
• The AiB's own guidance demonstrated that pension annuities were to be treated as income (and therefore outwith the Trustee's remit in terms of section 85(1) of the 2016 Act), albeit the Trustee retained the right to seek a contribution via a debtor contribution order. 
  
  
• Whilst it is not determinative of the Sheriff's view, the fact that HMRC treats (for tax purposes) the pension drawdown as taxable income serves to back up the view of the Sheriff.

We understand that the case will not be appealed and the position is that in the circumstances set out above, the pension proceeds do not vest in a trustee. Trustees should note the difference if a debtor has already applied for (and received) their drawdown.