May 2007

Life's complexities

If the story of alternatively secured pensions (ASP) were a play, it would be rather long with an unconventional plot. Scene One would begin in the Plymouth area around 1820. The first characters on stage would be a new Christian movement, later to be known as the Plymouth Brethren.

This group has a religious objection to forced annuitisation but also retains an absolute belief that one must make provision for oneself and one's family. Their request for an alternative to annuities was met with the introduction of ASPs from 6th April 2006.

However, even before their introduction, the Government had become increasingly concerned that interest shown in the concept of ASPs suggested widespread use was becoming a possibility. The plot takes a twist with use becoming confused wth abuse, and a raft of speculation and consultation taking place.

It was therefore announced in the Budget on 22nd March 2006 that ASPs would be subject to inheritance tax at 40% if a transfer lump sum death benefit is transferred to a member of the same scheme, other than a spouse, civil partner or other financial dependent. Explaining its rationale, the government reiterated that ASPs were designed specifically for those with a principled religious objection to annuitisation.

Another twist

Eight months later and the plot takes another twist. The Government was still concerned about the attractiveness of ASPs so in the pre-Budget report on 6th December 2006 it announced a new minimum income level of 65% of the annual amount of a comparable annuity for a 75-year-old. Further tax charges to be paid in addition to IHT for transfer lump sum death benefits were also added, bringing the total charges up to a potential 82% of the fund value.

The latest scene of this evolution as just been written in the form of the 2007 Budget, which announced further consultation and amendments to the tax treatment and rules surrounding ASPs. The minimum income has now been reduced from 65% to 55%. With no irony, we were also reminded that "... it is clear that there remains a minority interested in continuing to explore the scope for using ASP to accumulate capital, rather than to provide for an income." If the minimum income requirement is not met, a scheme sanction charge will be applied.

There are also proposed modifications to the IHT charges on ASP introduced by the Finance Act 2006, which will allow more flexibility where there is some unused nil rate band before the ASP funds are taken into account.

Elsewhere in the reams published on Budget day. The Government explained that it considered four options in looking at how to set the rules for ASPs. The first was the unpalatable option of doing nothing, which as well as allowing people to avoid annuitisation would enable individuals "... to produce from their tax-privileged pension saving not a secure income in retirement but a capital sum that they could pass on to their heirs after age 75".

Although some might like the religious argument to quietly go away, it too got a mention. The Government reiterated in its Budget publications that it "... has been clear that the reason for introducing ASPs was for those who have principled religious objections to the pooling of mortality risk in annuities." If it cannot be restricted to its intended use, is use that is unrestricted without reference to religion, therefore abuse? While religion, politics and pensions might just about provide material for a play, it is not the stuff that pension policy should be made of.

Options

Another option the Government considered was to scrap ASPs entirely, leaving lifetime annuities and scheme pensions as the only form of authorised pension benefit for the over-75s. Although not currently selected, it was silent on whether this remains as a feasible option in the future.

With those options ruled out, the Government has decided to pursue its option to introduce tax charges for ASPs to ensure that pension saving is used to provide an income in retirement. There are still details to be ironed out, but broadly the Government indicated that its philosophy in dealing with ASPs has been set.

So for advisers with clients approaching their 75th birthday, what should they do? Despite the ongoing discussions on the definition of use and abuse, today ASP remains a viable financial planning option for a restricted few. It appears that the Government has considered and removed the religious and risk of abolition arguments from the debate, for now at least. The broad intentions of how ASP will be taxed have been illustrated, but the detail is still to be clarified so we will all need to keep following progress in this area.

Billy Mackay
Head of Marketing
Skandia Life