Selling property prior to 75 is no longer compulsory, but there is still unease over the ASP, warns Peter Weir, director and head of property at Suffolk Life
Property is, of course, an illiquid asset. Therefore, anyone who is retiring and wishing to purchase an annuity needs to give early thought to selling property so that it can be disposed of in a timely way and to the best advantage. This was particularly the case prior to 6 April 2006 when scheme members who owned property were approaching their 75th birthday and had to liquidate all of their investments in order to purchase an annuity.
This pressure to sell has now been alleviated because, if a scheme member cannot sell their property at 75 or perhaps simply does not wish to do so, then there is no legal compulsion. Instead of purchasing an annuity, they can enter into alternatively secured pension (ASP) arrangements. Given that a Sipp can be established for someone immediately after they are born, it means a property can be purchased and retained from birth until death.
Not only has A-Day provided an alternative to a forced property sale at 75, it has also enabled scheme members taking unsecured income to use their property investment more effectively. This is because the previous prohibition on borrowing in drawdown has been removed.
Therefore, a scheme member taking unsecured income is able to use a property to raise money for proper pension-related purposes provided he complies with the new borrowing rules. In short, borrowing at all ages is legally possible - although it may not in all cases be financially prudent.
The new rules mean greater flexibility for scheme members in keeping and managing their properties. Most importantly, the scheme member does not have to say goodbye to a beloved property investment on reaching the age of 75.
Whether or not the scheme member has a property in their scheme is a very important subject for advisers to consider. As is well-known, if a scheme member dies after the age of 75 while in ASP the residue of his fund must initially be used to provide benefits for any surviving spouse or financial dependant.
But, if there is no such person or if following the death of a spouse or financial dependant there are assets left in the fund, they can be added to the fund of any other scheme member, who may be nominated by the original scheme member prior to the date of his death. And if there is no nomination, then the scheme administrator has a discretion to transfer what is left of the fund and could, therefore, add it to the funds of any children who were scheme members.
There has recently been some intriguing correspondence with HM Revenue & Customs regarding nominations and their validity. The starting point is that the legislation seems quite clear. If the residue of the original member's fund is to be added to that of another member, the nominee must be a member of the scheme at the date of nomination.
From a financial point of view, this may not be wholly convenient because the would-be recipient will need to set up a scheme and maintain it, which in turn will result in the payment of fees. And it may be many years before the nominated fund receives anything.
However, if the nominee is not a member at the date of nomination, there is a danger that the nomination is legally invalid. Moreover, in these circumstances the scheme administrator would not be able to step in and save the day. This can only happen in the absence of a nomination by the scheme member.
The Revenue seems recently to have accepted that if a nomination is invalid - for example, because the nominee was not a scheme member at the date of nomination - the nomination may be considered to be void, in other words, as if it were never made at all. That would therefore enable the scheme administrator to step in.
But advisers should be very wary of relying on this. There is a difference between something that is void and something that is invalid - a nomination judged to be the latter may well remove the administrator's discretion. The Revenue is not bound as a matter of law to the view it seems currently to have accepted.
More importantly, neither are others. There is a danger that, unless the nominee is a member at the date of nomination, the transfer will fail or be challenged. Advisers should make the position clear so everyone is fully aware of the risks if a recipient scheme is not set up in timely fashion.
There is a further issue developing with ASP. Originally, the Government said it intended ASP for those who had principled objections to annuities. The legislation,, of course, does not discriminate in this way. It makes ASP open to all.
There have been some interesting recent Government announcements stating ASP was never intended as a free-for-all to avoid compulsory annuitisation. However, it is difficult to see how ASP can be restricted to people with, say, religious objections to annuities.
Apart from such legislation being discriminatory, it would be impossible for administrators to police properly. Hence, as a matter of practicality, it is likely ASP will either remain as it is or be repealed altogether. Advisers speaking to clients about ASP should be aware of current Government unease and advise of the risk that ASP's future may not be wholly certain.
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