Plan for your future

Pension advice from Turcan Connell

Pension simplification was supposed to give people flexibility and choice in saving for retirement. But recent government announcements suggest that, instead of providing pension savers with added flexibility, the new regime is restricting it, says Bob Hair, director of financial planning at solicitors Turcan Connell.

After decades of falling annuity rates, the new regime of pension simplification introduced on A-day last year brought some hope for savers when the Government introduced a completely new retirement product. The alternatively secured pension (ASP) was an approved fund that would remove the need to buy an annuity  at the age of 75. Because an ASP is a private fund, not an annuity held by a life company, many people saw it as a way to let future generations benefit from their pension arrangements.

If this all sounds too good to be true, it probably is. The initial legislation made no mention of the inheritance tax treatment of ASPs. To ensure no tax loss, the Government subsequently announced that any funds left in an ASP after death would attract inheritance tax at 40% before being made available to other members of the scheme. In practice, no financial planners ever really believed that the residual fund would escape tax, so this seemed fair.

But tucked away in a supporting publication to last December's pre-budget speech lay a more severe attack on ASPs.

If you have not yet purchased an annuity by the age of 75, you will still be able to draw a pension through an ASP, but there are limits on the amount you can draw. You will have to take a minimum of 65% of the annuity rate for a 75 year old, but will be able to take an upper limit of 90% of the applicable rate. This is sensible, as the previous range was from 0 - 70%.
 
Whichever you choose, the Treasury will receive income tax. But the changes did not stop there. Any funds left after the member's death can only be paid out as an "unauthorised payment", which is taxable at up to 70%. On top of this, inheritance tax must be paid before funds are passed on to other scheme members.

This double charging means that funds left in an ASP could be taxed at up to 82%. In addition, proposed changes to scheme pensions, which are typically used by money purchase company pension schemes, will make it more difficult to leave a pension legacy in family companies.
 
But it's not all about leaving funds behind. Many people simply believe that annuities are poor value because they offer a fairly low annual income with no opportunity to participate in investment growth.

If your pension fund is only one part of a portfolio of assets, you may have less need for its income than when you started your fund. So what can you do to help keep your pension funds "in the family", as it were?

Well, you still have a few choices:

• take as much tax-free cash and pension as possible before you reach 75 (this will limit the amount used to eventually buy an annuity);
• take out a capital protected annuity when  you retire (this will ensure your family at least gets the full value of your pension fund back);
• if there is a big age difference between you and your partner, an alternatively secured pension is still an option - the younger partner would not necessarily be 75 when they inherit the pension fund, so the day of annuity purchase could be stalled for as long as possible in the hope of further changes in legislation;
• buy an annuity at retirement - if you don't need the money, simply make gifts of the income under the gifts from normal expenditure exemption;
• better still, buy a life policy and pay the premiums with the income from your annuity (if you write the policy in trust you could leave an inheritance to the family);
• if you are internationally mobile, you could transfer your pension fund to a jurisdiction with more appealing inheritance rules;
• and finally... if you have made provision for your family in other ways but cannot face giving the Treasury more tax, you could still take out an alternatively secured pension at 75, but on death leave the remainder of the fund to charity.

This latest tax grab is hardly an example of flexibility and choice in retirement planning. But whatever happens with our ever-changing legislation, there are always ways to plan your future - with the right advice, of course.

To find out more, contact Turcan Connell
t 0131 228 8111
www.turcanconnell.com

If you have not yet purchased an annuity by the age of 75, you will still be able to draw  a pension through an ASP.

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