An alternatively secured pension lets you pass on your capital... well, sort of.
The Alternatively Secured Pension (ASP) was introduced in April 2006, and many Fools may be attracted to the idea of not having to purchase an annuity at age 75, especially given the current feeble rates. However, the rules relating to ASPs are often misunderstood despite the potentially huge and ruinous tax consequences on death.
What is an ASP?
ASPs were actually introduced to provide a means of drawing a pension for those who did not believe in the concept of annuities (being an insurance product), such as the Plymouth Brethren. Obviously such products could not be offered in a discriminatory way -- such as on the grounds of religion -- so they were made available to all.
The original ASPs were the Holy Grail of pension investment, with few restrictions and fewer punitive tax charges. However, just one year later, in April 2007 the Government got cold feet, as the previous system was just too attractive, and was already facilitating new and costly tax planning schemes. As a result, the 2007 reincarnation of the ASP was the plain older sister, that everyone got left with once the attractive one had been spoiled by looters.
The basic rules
An ASP is basically an extended version of income drawdown available on most personal pensions up to age 75. Instead of purchasing an annuity, ASP holders can continue to invest their pension fund wherever they choose and can instead draw an income from within prescribed limits. Income is taxed as pension income, and subject to income tax in the normal way.
The income that must be drawn must be between 55% and 90% of a figure calculated by a Government Actuary (like an accountant, but even more esoteric) with reference to annuity tables for someone of the ASP holder's sex and aged 75. These minimum and maximum figures are recalculated each year, but is always based on age 75, even if you get to 105.
Basically, you cannot get away from annuities entirely. Anyone would think insurance companies had some sway over the Government, evidenced by, say, special sections in Finance Act 2006 which protected them from the changes to trusts or something… but I digress. More information on the rates used can be found here, for anyone interested.
Death and Taxes
The main advantage of ASPs was the relatively benign tax treatment on death. If you die after having invested in an annuity, you may (or may not) be entitled to a spouse's pension, but the capital used to purchase the annuity is lost, even if you die the day after purchase.
In addition, in 2006, the minimum amount of income withdrawal was a massive 0%, meaning those who did not need to draw an income could effectively have invested in tax-favoured pension plans all their lives, then pass the fund to family members with little tax consequences.
Under an ASP you do not lose the capital value of the fund, as you would with an annuity, but there can be some hefty tax consequences.
If the fund value is used to provide a dependants' pension, then there are no tax nasties -- the income is merely liable to income tax in the recipients' hands. However, note that 'dependant' includes spouses (naturally) and children under the age of 23.
Older children will only be eligible if they are dependant owing to a physical or mental impairment, or if they can be proven as someone financially dependent. Despite my youthful appearance, I had probably better go have words with my Dad then.
If however, your spouse is already provided for, and you want to effectively transfer the capital value to your children, or other beneficiary, that is when the big tax guns come out.
Inheriting an ASP fund
Inheriting an ASP is an expensive business. Unless you are a charity (charity cases do not count I'm afraid.)
First of all, any value passing to anyone other than a dependant (see above) is subject to an unauthorised payment charge of up to 70%. That's right, I said 70%. This charge is levied by the scheme administrator, so your dependants cannot grab the cash and run to a tropical island to spend it on frivolous cocktails. Not that I would recommend that course of action anyway, you understand. Well I like cocktails, but being on the run is overrated.
So once your, say, £1 million fund is reduced to £300,000, what happens next -- 30% is better than 0%, right? Well yes, but your beneficiaries don't get 30% either. The £300,000 then falls into your death Estate and is subject to inheritance tax. Assuming there is no nil rate band available, this is likely to be a 40% charge, namely £120,000.
So at the end of the day, your £1million fund translates to an inheritance of £180,000, just 18% of the original sum, or to put it another way, subject to 82% tax. Nice little earner… for the taxman.
What do you think? Do you have an ASP? Are you still considering one? Is leaving a measly 18% to your children under an ASP better than an insurance company potentially pocketing the lot?
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