You could buy an Alternatively Secured Pension instead of buying a pension annuity. Called for ease ASP, this was introduced in April 2006, and many may be attracted to the idea of not having to purchase a pension annuity at age 75, especially given the current low annuity rates. However, the rules that exist relating to ASPs are often misunderstood despite the potentially huge and somewhat ruinous tax consequences on your death.
ASPs were actually introduced to provide a means of drawing a pension income for those who did not believe in the concept of annuities (being an insurance company product), such as, for example, the Plymouth Brethren. Obviously such products could not be offered to people in a discriminatory way, such as on the grounds of religion, so they were made available to all.
The original ASPs were called the Holy Grail of pension investment, with only few restrictions and fewer punitive tax charges. However, just twelve months later, in April 2007, our Government got cold feet, as the previous system was just too financially attractive, and was already facilitating some new and costly tax planning schemes. As a result, the 2007 reincarnation of the contract was the plain older sister, that everyone got left with once the attractive version one had been spoiled by looters. Too many people were looking at it instead of buying a pension annuity.
An ASP is effectively an extended version of income drawdown (now unsecured pension) available on most personal pensions up to age 75. Instead of purchasing a pension annuity, ASP holders can continue to invest their pension fund wherever they choose and can instead draw down an income from within prescribed limits. Income is therefore taxed as pension income, and subject to usual income tax.
The income that must be drawn down must be between 55% and 90% of a figure calculated by the Government Actuaries Department (GAD) with reference to annuity tables for someone of the ASP holder’s same sex and aged 75. These minimum and maximum income figures are recalculated each year, but is always based on age 75, even if you’re aged 105. Basically, you cannot get away from pension annuities entirely.
The main advantage of ASPs was the tax treatment on death. If you die after having invested in a pension annuity, you may (or may not) be entitled to a spouse’s income, but the capital used to purchase the pension annuity is lost, even if you die one day after purchase. In addition, in 2006, the minimum amount of income withdrawal was set at 0%, meaning those who did not need to draw an income could have invested in tax-favoured pension plans all their lives, then pass the pension fund to family members with little tax consequences.
Under an ASP you do not lose the capital value of the pension fund, as you would with an annuity, but there can be some hefty tax concerns. If the fund is used to provide a dependants’ pension, then there are no tax nasties, and the annuity income is merely liable to income tax in the recipients’ hands. However, note that ‘dependant’ includes spouses (naturally) but only children under the age of 23. Older children will only be eligible if they are dependant because of a physical or mental impairment, or if they can be proven as someone really financially dependent.
If however, your spouse is already financially provided for, and you want to effectively transfer the capital value to your various children, or other beneficiary, that is when the big tax liabilities arise. Inheriting an ASP fund is an expensive business, unless you are a proper charity. First of all, any value passing to anyone other than a dependant is subject to an unauthorised payment charge (interesting phrase) of up to 70%. This charge is actually levied by the scheme administrator. Looking at figures, let’s say your £1 million fund is reduced to only £300,000, what happens next? Well, your beneficiaries don’t get that 30% either. The £300,000 then falls into your overall estate and is subject to inheritance tax. Assuming there is no nil rate band available to you, this is likely to be a 40% charge, or £120,000. At the end of the day, your £1million pension fund could translate to an inheritance of £180,000, just 18% of the original amount.
