November 2007

Level playing field?

Dear Editor,

It is interesting to read comments, following the Chancellor's Pre-Budget Statement, that the advantages of scheme pensions, under SSAS and family pension trusts, are now gone and that there will be a "level playing field" between scheme pensions and alternatively secured pensions. This is a clear simplification of the position. What the statement said was:

"Legislation will be introduced in Finance Bill 2008 to ensure that tax-relieved pension savings diverted into inheritance using scheme pensions and lifetime annuities are subject to unauthorised payment tax charges and, where appropriate, inheritance tax (IHT). This measure will have effect for surrenders made on or after 10 October 2007 and for increases in pension rights attributable to the death of a member when the member dies on or after 6 April 2008. The IHT provisions will also have effect when the member dies on or after 6 April 2008."

In spite of this further amendment to pensions legislation, scheme pensions remain the most appropriate method of drawing a pension post age 75. It is now quite clear that under these rules it is not tax-efficient to die leaving any pension fund after age 75. Advisers will need to help their clients who have large funds understand that they should seek to withdraw a maximum pension from the fund even if they do not need that income. It will be far better to take the income and gift it to a trust, or even a life assurance policy written in trust for future generations, than leave it in the fund to be subject to the penal inheritance tax and unauthorised payment charges. Such a gift should be exempt from inheritance tax.

Alternatively secured pensions are limited in the amount a member may draw to 90% of the annuity rate for a 75 year old, irrespective of the member's age. This will inevitably leave a surplus on death.

A scheme pension is not as restricted. It will be actuarially calculated to aim to use up the entire fund by the member's death, and will be based on the member's actual age. In practice this means a larger pension will be justified and will therefore help reduce any potential surplus.

David Seaton
Director of Consultancy
Rowanmoor Pensions