Mike Morrison talks about how he sees alternatively secured pension (ASP) evolving
I have been at a number of meetings and conferences recently where people have spoken about the need to abolish compulsory annuitisation at age 75.
Now, this could be a slip of the tongue or it could be a sign that many do not regard the alternatively secured pension (ASP) regime as having much of a future or being of much practical use.
Just to recap, at age 75, ASP requires a minimum income of between 65% and 90% of Government Actuary's Department rates, with GAD rates being restricted to those applicable for a 75 year old, even as the client gets older.
As an aside, age 75 does seem to be somewhat random particularly at a time when we are being encouraged to work longer and where some ability to be flexible might make pensions more attractive to those who are not currently saving. Could we not have increased age 75 to age 80 at the same time in 2010 when age 50 goes up to 55 for the commencement age for drawing a pension?
Any residue on second death, or first death without any dependants, (the transfer lump sum death benefit) would then become an unauthorised payment and subject to a whole raft of potential tax charges, namely:
- Unauthorised payment charge of 40%;
- Unauthorised payment surcharge of 15%;
- Scheme sanction charge of 15%;
- IHT of 40% could also still apply.
There could also be a scheme deregistration charge of 40%.
This does not look good with the possible tax charge being something like 82%. It is compounded by the fact that there are few providers that will pay the remaining 18% unauthorised payment.
There are a couple of things worth noting:
- There was always likely to be a limited market for ASP but of that market there are likely to be an even smaller number of people who would go through ASP and leave a large sum of money, particularly if we are all living longer and if we face the ravages of inflation;
- The tax charge becomes payable on second death, perhaps maximising the time for planning.
Where can ASP add value?
Generally, I think clients can be divided into four types:
1. Husband with a wife who is considerably younger - in such circumstances there is the rest of the husband's life and potentially the wife's life for planning (and she is likely to live longer than he would have done);
2. Wife with a husband who is considerably younger - again there could be two life expectancies for planning purposes, although the second life is statistically the shorter life;
3. Husband and wife of similar age - decisions and pension planning must be based more on the specific details of the clients, particularly any factors that might affect life expectancy;
4. A single male or female client with no dependants - this is perhaps the most problematic as the tax charge will become due on the first death (a convenient civil partnership or marriage could be a creative tax saving solution)!
In the first two categories the death of one party in ASP could see the dependant in unsecured pension (USP) and therefore with the option of a death benefit of the fund value less 35% tax. It is also important to remember that annuity purchase is always an option.
The planning process for ASP could be to just spend the pension fund as quickly as possible, perhaps drawing more income than is specifically needed with the excess income being invested as a third party pension contribution to perhaps a spouse or children.
As an alternative, the extra contribution could be invested into another investment vehicle which has a more beneficial tax charge than ASP. This could be put into an investment bond in a trust, a whole of life policy or even into a portfolio of AIM stocks which would not be subject to IHT on death.
As people get older is it likely that they will not want to have to continually monitor their investment portfolio? This might be particularly relevant when people get into their 80s and more and more people will be living this long.
At this age it might be that an annuity is chosen as the ideal form of providing an ongoing stream of income with certainty and peace of mind.
If an annuity is seen as longevity insurance, the rates get better the later that you buy, so if that annuity is not purchased until the client is in his eighties then an enhanced rate might be available. It might even be possible to buy an annuity with a guarantee period which could guarantee a stream of income back to the deceased's estate.
Is it worth it?
Is ASP worthwhile? I think that for the right people there can be real planning opportunities and while the restrictions and the tax charge might not be the ideal, it offers more opportunity than before A-Day when there was compulsory annuitisation at age 75.
The tide (and the rules), are likely to change, there is talk of legal challenge to the rules or even a change of Government with a number of alternative structures being suggested.
Retirement planning is going to become increasingly important in the future as more and more of the baby boomer generation reach retirement age and product innovation is likely to become more important. We are already seeing the development of third way 'variable annuity' products, but so far these innovations are restricted to the pre age 75 market. For real innovation HMRC must be prepared to allow a bit more leeway - perhaps involving guarantees and perhaps allowing pension money to be passed on down the generations.
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