Advisers should be aware there may be a double tax charge on Alternatively Secured Pensions (ASP) in some cases following the Budget's announcement on Inheritance Tax (IHT) rules for pensions, claims Skandia.
It says this double tax charge could occur when a dependent who has benefited from ASP funds dies before the age of 75, with the remaining funds being paid out as a lump sum to anyone but a charity.
In this case, according to the guidance provided with the legislation, the IHT charge of 40% will take priority over the pension scheme tax charge of 35% which is applied to the remaining fund after the IHT has been deducted.
According to Skandia the net affect of both charges is a total tax charge of 61%, which is 40% IHT plus another 21% which is 35% of the remaining 60% of the fund.
As a result Skandia says the IHT treatment of ASP arrangements is a step backwards from the aim of attracting more people to invest in pensions, because the decision to introduce IHT on transfer lump sum death benefits paid after the age of 75, except for certain circumstances, adds unnecessary complexity which advisers will have to carefully communicate and document when advising clients.
The company says although Her Majesty’s Revenue and Customs (HMRC) has stated a clear aim to “restrict ASPs to their original limited purpose”, many individuals have an issue with the idea of having to buy an annuity by age 75.
Skandia argues before the Budget, the proposed new rules for ASPs would have helped to make pensions more attractive to many of these people.
Billy Mackay, pension marketing manager at Skandia, says demand for advice on flexible retirement scenarios is on the increase, and the Budget changes will mean advisers must ensure the potential for IHT is clearly communicated.
He adds: “HMRC has nailed its colours to the mast and made it clear it wants to minimise the attraction of ASP. This is disappointing because research we carried out with advisers before the Budget showed 94% thought flexible retirement options available under Unsecured Pensions (USP) and ASP arrangements would be attractive to their clients.”
Mackay points out while the HMRC has stated it will work closely with the industry o help minimise any regulatory impact in pension schemes, there will be ASP business written from 6 April with the immediate likelihood of death claims, which will undoubtedly create confusion as to how these new rules should be applied.
Maureen Duckworth, pensions technical manager at Scottish Life, says by applying this double charge the Revenue are recognising this money is derived from Alternatively Secured Pension (ASP), but is actually being paid out under the rules that apply to those under age 75.
This is because, in theory, a lump sum isn’t an option for ASP, unless it is a transfer lump sum death benefit, or a payment made to a charity nominated by the member, however because the dependant is under the age of 75 the income drawdown rules that apply allow money to be taken as a lump sum.
She adds: “I don't think this is fair as it is. It would be fairer to treat the money as either ASP or not, so apply either a 40% or a 35% tax charge, not both. It looks like the policy intention here is to make the taking of a lump sum unattractive, as opposed to saying that because the money derived from ASP that it's not allowed. So, a lump sum is an option but there's a price to pay, and not an inconsiderable one.”
Duckworth points out the only way this charge doesn't apply is if the lump sum payable on the death of the dependant is paid to a charity, which she says is quite harsh to treat dependants of scheme members in this way.
Patrick O’Brien a spokesman for HMRC says: "There are choices in the pension rules on how pension funds can be used. Generous tax reliefs are given to provide a secure income in retirement. Where ASP funds are paid other than for that purpose, there is no reason why tax charges should not apply."
He also adds the example raised is no different from any other case where the payment of a lump sum death benefit results in a pensions tax charge and also in an inheritance tax charge.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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