The government has reduced proposals for the minimum amount of income which must be drawn from an Alternatively Secured Pension from 65% to 55% of a comparable annuity for a 75 year old, but has retained the unauthorised payment charges on funds left over when a member dies.
However, in Budget Note 19 (BN19), the government says following consultation with industry, there will be special rules for scheme members who cannot be traced at age 75 who at the moment are automatically placed in ASP.
In addition, the document confirms the new tax charges, which will be included in full in the Finance Bill 2007, will not affect funds where the member or dependent dies before the 5 April 2007 - a change from the Pre-Budget cut-off date of 6 December 2006.
Despite industry campaigns, the government has refused to remove the unauthorised payment charge, however it says the Finance Act 2004 will be amended to ensure “the scheme sanction charge may be discharged where it would not be just and reasonable to apply it in certain circumstances where there has been a failure to operate the minimum income requirement”.
The industry has been concerned the combined tax charges of unauthorised payment, inheritance tax (IHT) and scheme sanction charges could leave members facing tax charges of between 82-90%.
However, BN19 states the government is changing the ASP provisions in the Inheritance Act so members who die on or after the 6 April 2007 IHT will be calculated by making the member’s estate - excluding ASP funds - the priority for the nil-rate threshold, which will rise to £300,000 from April.
Any part of the nil-rate band left over from this calculation can then be offset against the ASP funds attracting IHT, providing the IHT due date arises before any unauthorised payment charge.
The note says this change has been introduced as it recognises the “gross ASP funds will be subject to subsequent unauthorised payment charges of up to 70%”.
But if the unauthorised payment charge is levied first, IHT will apply to the remaining ASP funds.
Any tax-charge which applies on left-over funds when a relevant dependent - receiving ASP benefits - dies will be calculated at the rate of tax applying on that date the dependent dies, and not from the time of the original member’s death.
In addition, BN19 says this rule will be modified so if the IHT nil-rate band was not fully used when the original ‘owner’ of the ASP died, the left-over proportion of the nil-rate band will be added to the amount of nil-rate band in force at the time of the dependent’s death, with the increased amount then available to be used against the ASP funds.
At the same time, the government has introduced new rules for pension scheme members who cannot be traced as, at the moment, their funds are automatically placed into ASP at the age of 75 - without a minimum income - as a way of keeping the funds in suspense.
As a result, the government says the Finance Bill 2007 will include measures which means after schemes have made "reasonable attempts" to trace members before their 75th birthday, funds will be frozen after a specified date and will not become ASP funds so will not incur any tax charges.
There will be no requirement to offer minimum income payments on these arrangements while the member can’t be traced, but once the member has been contacted they will have six months to make a decision on their options before payments should start.
If a member is found to have died after the age of 75 without being traced the funds can be paid to a charity or as a pension to a dependent free of charges.
However, if the funds are reallocated into pension pots of other members, unauthorised payment charges and IHT will apply in the same way as if the member consciously chose to stay in ASP.
Schemes where the members are already over the age of 75 and have been transferred to ASP as a holding requirement will see funds will be automatically frozen, and will be held under the same provisions as funds for under 75s.
The government has also warned it will be consulting on measures which will be introduced to “prevent ways of inheriting tax-privileged pension savings”, with more details to be included in a HM Revenue & Customs consultation paper.
Rachel Vahey, head of pensions development at Aegon Scottish Equitable, says the government appears to have stuck to the false belief that widespread use of ASP would give the Treasury a lower tax take than if people buy annuities.
She adds: "We believe ASP was destined only ever to be a niche product but today’s changes will marginalise it even further. Annuities are the preferred option for most people but choice is important and it’s wrong to force them down that route."
"There are many other ways in which the government could have increased the tax payable under ASP yet leave it as a viable alternative to annuity purchase. We are disappointed the government has chosen instead to stick largely to the draconian measures outlined in the pre-budget report.”
Andrew Tully, marketing technical manager at Standard Life, says it is disappointing the government has made these changes, especially the tax charges on ASP death benefits.
He adds: "We believe the government has made the changes based on a perceived problem rather than hard evidence of tax avoidance. However Standard Life is pleased that ASP has been retained."
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 7034 2681 or email [email protected].IFAonline
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