October 2007

Misunderstanding scheme pension

Dear Editor,

Recent comments in the press are incorrectly suggesting that scheme pensions are a loophole in the legislation for inheritance tax avoidance. I suspect that this comes from a misunderstanding about how a scheme pension must be calculated and a lack of understanding of the benefits a scheme pension can have for some schemes and their members.

A scheme pension must be actuarially calculated on the basis of a reasonable level of investment return, the members' life expectancy and on the basis that at the time of death there would be no fund remaining.

They offer a legitimate third choice for members of SSAS and Family Pension Trusts. Take a man age 75 with a crystallised pension fund of £500,000 at age 75 with a wife of similar age. He can buy an annuity which in today's market would provide a level pension of £40,700 per annum with a 100% widow's pension, (best annuity rate from the Exchange). He could also go into alternatively secured pension (ASP). The current maximum would be a pension of £47,700 and the minimum of £26,500, (based on gilt yield of 5.25%). However, even assuming that the fund was invested relatively aggressively (50% in equities, 20% property, 20% bonds and 10% cash) the likely long-term sustainable income would be around £35,000 (Rowanmoor Pensions Actuarial Department).

For those in SSAS and Family Pension Trusts there is the third option of a scheme pension. On the above investment strategy an actuary would be prepared to certify a scheme pension of £47,750 per annum (Rowanmoor Pensions Actuarial Department). It would be expected to be sustained until the second death and for the fund to be extinguished on that death.

It is unfortunate to read that some life office spokesmen think this is tax avoidance planning. With a higher pension being drawn the Exchequer collects more tax, not less. It is true that if the couple both die before their life expectancy then there would be some fund left which would be available to be allocated to other members of the scheme. However, it is a well accepted maxim that people don't die to avoid tax!"

David Seaton
Director of Consultancy
Rowanmoor Pensions