ASP

The Alternatively Secured Pension (ASP) was first introduced in April 2006, as an alternative way for people who did not believe in the concept of annuity purchase (as they are an insurance product), for example, the Plymouth Brethren. Such products could not be offered in a discriminatory way, such as on the grounds of religion, so they were made available to everyone.

Changes in 2007

Too attractive

The original ASPs were known by many as the Holy Grail of pension investment, having few restrictions and few  tax charges. However, in April 2007, the Government got cold feet, as the previous system was just too financially attractive, and was already facilitating some new and costly tax planning schemes. Therefore, hefty changes were introduced.

The basic rules for an ASP

An extended version of income drawdown

An ASP is effectively an extended version of income drawdown (now unsecured pension) available on most personal pension plans up to age 75. Instead of purchasing a lifetime annuity, ASP holders can continue to invest their pension fund monies wherever they choose and can instead draw down an income from within prescribed limits. That income is taxed as pension income, and therefore subject to income tax.

Income levels

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 sex and aged 75. These minimum and maximum figures are recalculated every year, but are always based on age 75, even  if you are aged 101.

Death and Taxes

Now quite punitive

The main advantage of the older style ASPs was the tax treatment on death. If you die after having invested in an annuity, you might  be entitled to a spouse’s pension benefit, but the capital used to purchase the annuity is lost, even if you die just after purchase.

In addition, in 2006, the minimum amount of income withdrawal from an ASP was actually 0%, meaning those who did not need to draw down an income could effectively have invested in tax-favoured pension arrangements 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 changes from 2007 mean there can be some hefty tax consequences. If the fund value is used to provide a dependants’ pension benefit, then  the income is merely liable to income tax in the recipients’ hands.

Dependants

A ’dependant’ under the ASP rules includes spouses (naturally) and 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 being someone financially dependent. 

Inheriting an ASP fund; potentially heavy tax charges

If your spouse is already provided for, and you want to effectively transfer the capital value of your fund to your children, or other beneficiary, that is when tax implications can really hurt. Inheriting an ASP fund is an expensive business, unless you are a registered charity.

Any value passing to anyone other than a dependant is subject to an unauthorised payment charge of up to a hefty 70%. This charge is levied by the scheme administrator.

Let’s say your £1 million fund is therefore reduced to £300,000; your beneficiaries don’t get that either. The £300,000 then falls into your overall estate and is subject to inheritance tax. Assuming there isn’t a nil rate band available, this is likely to be a 40% tax charge, namely £120,000.

Therefore, your £1million fund translates to an inheritance of only £180,000, 18% of the original sum, effectively having suffered an 82% tax.