Alternatively Secured Pension
Overview
This is a new type of pension plan which provides
individuals with an alternative to annuity purchase at age
75.
An annual income (taxed as earned income) must be taken from
the invested pension fund. This income cannot exceed 90% of
the Government Actuary's Department (GAD) rate for a male or
female aged 75. There is a minimum limit of 55% of GAD. The
plan is reviewed annually with the income limit being
amended as appropriate at that point (but the income rate is
still based on a 75 year old plan holder regardless of
actual age).
If you were already taking income via ASP before 6th April
2007, you may continue to draw an income of between 0% to 70
of GAD but ONLY until the next annual review date of the
plan. At this annual review date, the minimum income will
need to be recalculated in line with a minimum of 55% and
maximum of 90% of GAD.
Tax Free Cash
The individual’s right to take a tax free cash lump sum will
be lost under this type of plan. If tax free cash is
required, it must be drawn before age 75.
Income
A pension income can be taken each year subject to a maximum
of 90% of the GAD rate. This income is taxed as earned
income under the PAYE system.
Death Benefits
If you die whilst in Alternatively Secured Pension your
remaining fund would provide an income to your dependents
either via a scheme pension, an unsecured pension, a
lifetime annuity or an alternatively secured pension (if
over age 75).
If you had no dependents then your choices would possibly be
as follows:-
1. The remaining funds would pass as a lump sum to the
deceased member’s nominated charity – this is free of IHT.
All ASP providers offer this.
2. Between the 6th April 2006 to 6th April 2007, there was a
permitted facility to transfer the remaining funds to
another member(s) of the deceased policyholder’s pension
scheme (e.g. a family member who has a pension with the same
provider.) However, since the 6th April 2007, whilst some
providers may still offer this an option, HMRC now levy an
unauthorised tax charge on this type of transaction.
3. If funds are passed to other family members (i.e. non
spouse or dependents) by way of a return of the monies as
‘cash in hand’ this is also treated as an unauthorised
payment.
Unauthorised payments result in a 70% tax charge, plus a 40%
IHT charge on the remaining 30% of the fund.
This could result in a total tax charge of up to 82%. In
reality, it is unlikely that providers or schemes will
permit this as it may trigger a scheme sanction charge.
Due to this fact some providers will not offer this an
option.
There is no option to take a return of fund less tax.
Inheritance Tax Issues
The Capital Taxes Office (CTO) have recently clarified that
Inheritance Tax would apply to benefits under this plan that
are transferred to another member of the policyholder’s
pension scheme on the individual’s death. IHT would not
apply on transfer to a charity, a spouse / civil partner or
dependent.
Additionally, if a spouse / partner or dependent inherited
these benefits on the death of the member, on their
subsequent death any remaining funds would be added to the
original planholders’ estate to calculate if any additional
IHT liability arises.
Advantages
● You may draw an annual income
from the fund in line with a minimum of 55% and maximum of
90% of GAD.
● You are able to switch to a
lifetime annuity or scheme pension at any point.
● ASP is a tax efficient way of
making substantial charitable gifts
● ASP allows the opportunity to
provide pension income to dependants.
● ASP provides an alternative to
annuity purchase.
Disadvantages
● The capital could be eroded if
income is withdrawn and investment returns are poor
● As a client ages, the income
gap between an ASP and a secured pension will widen due to
the annual reviews being based on a client aged 75.
● Due to the requirement for
annual reviews, the product will incorporate higher charges
than a secured pension.
● The Financial Services
Authority (FSA) has particular concerns in relation to
mortality risk. If you purchase a secured pension such as a
lifetime annuity, you may benefit from a cross subsidy from
those annuitants that die relatively early. This cross
subsidy is not present with ASP and so to provide a
comparable income, a higher investment return will be
required. The impact of mortality can be expressed as an
annual percentage rate by which the net investment
performance of the remaining personal pension fund would
have to exceed the interest rate implicit in an annuity in
order to break even. This effect has become known as the
‘mortality drag’. This mortality drag is even more
pronounced due to the increased age of the policyholders.
● A relatively high investment
risk is theoretically required in order to compensate for
the mortality drag mentioned above. In practice, this
investment risk is unlikely to appeal to or be suitable for
clients in this age group.
● The complex nature of this
plan may be more difficult for older clients to understand.
● Likely IHT issues.
Suitability
Alternatively Secured Pension is likely to be suitable for
individuals who have no need for pension income, have a
substantial level of funds to place into the plan and wish
to pass their fund values on to financial dependants or
their chosen charity on death. It may also be useful for
individuals who are uncertain about their health and do not
wish to commit to purchasing an annuity at this stage. It is
generally envisaged that the potential disadvantages and the
inherent risks involved require the individual client to be
a relatively sophisticated investor, who is capable of fully
understanding the risks.