Pre-Budget Report; ASP Changes
The Pre-Budget Report contained changes, as expected, to the way that Alternatively Secured Pensions (ASPs) will work after April 2007.† I know you wonít find that surprising, but Iíve got the details on it here in case youíre interested.
A bit of background first.† People who are members of things we call Ďregistered pension schemesí are allowed to draw an income from their pension savings as an alternative to using those savings to buy an Ďannuityí.† An annuity is an insurance product that delivers a regular income for life in exchange for a cash sum up front.† An annuity, though, is a one-way ticket like any other insurance deal; if you die early your unspent money goes to the benefit of those who live on.† Given that we donít know exactly when weíre going to die itís sensible to use insurance principles in this way to enable people to be sure they wonít outlive their savings.† Essentially, itís a winners and losers thing though, with the winners being those who live on with the benefit of other peoplesí money to support them.
Between the ages of 50 and 75 people have lately been given the right to defer annuity purchase and draw down money every year (within fixed limits) from their pension pots direct.† This used to be sensibly called Ďincome drawdowní, but for reasons that are too hard to explain it is now called an Ďunsecured pensioní.† This is handy for loads of reasons and plenty of people now take advantage of this flexible way of managing their affairs as they go through the early stages of something we call íretirementí.† Using this method of deferring annuity purchase means that people unlucky enough to die before they reach the age of 75 have been able to leave their unused pension funds to people they are related to rather than to people they have never met (as they might have done if they were part of an annuity pooling arrangement).†
The new tax laws from A-Day (remember A-Day?† It was way back in April 2006) gave people over the age of 75 the chance to continue in a more restrictive form of income drawdown without ever having to buy an annuity.† This is referred to as an ĎAlternatively Secured Pensioní or an ASP for short.† There has been no requirement to draw a minimum income from an ASP fund, but the maximum annual drawing was restricted to 70% of the annual amount of a comparable annuity for a 75 year-old (donít ask why).† On death, any remaining funds could be used to provide dependantís pensions, but where there were no dependants the remaining funds could be paid to charity or to the pension pots of other members of the pension scheme.† The 2006 Finance Act introduced a new Inheritance Tax charge on any funds transferred on death that didnít go to the benefit of a dependant or a charity.
Thatís where we were until today, but the Government has been concerned that within all that flexibility there was too much scope for misuse of tax-preferred savings.† So todayís PBR has signalled changes that will come into effect next April, but some of which will require action before then by people already in ASP.
Today the Government has announced the introduction of changes to the tax regime for ASPs at Finance Bill 2007 with effect from 6th April 2007.† There will be a requirement to withdraw a minimum level of income each year from an ASP fund and the facility to transfer funds on death as a lump sum to pension funds of other members in the same scheme will be removed from the authorised payment rules, with such payments attracting an unauthorised payments charge.† These proposals are said to bring practice and policy intention into line and provide a fair balance between meeting the needs of those with principled religious objections to annuitisation and the needs of the wider public.† You may remember the Government has lately claimed that ASPs were principally designed to cater for the needs of those unable to enter into pooling arrangements on religious grounds; something to do with profiting from the death of others; that kind of thing.
However, the Government say that if these new proposals prove unworkable, or there is continued evidence of the use of pensions tax relief to provide capital sums throughout retirement they will consider whether to remove access to ASPs altogether.
So that there is no chance of any misunderstanding from my translating this stuff, however, Iíve decided to reprint below the contents of something called PBRN 13 that I found tucked away in the reams of stuff that I printed out from the Governmentís websites this afternoon as soon as the Pre-Budget Report ended.† Some of you may need to know the full SP on this so you know where you stand with clients you may have already advised to take advantage of the current ASP rules, or clients you may have who will pass their 75th birthdays between now and next April.† You may also have clients with Ďscheme pensionsí from occupational arrangements and will need to be aware of the possibility of further changes to come. Anyway, here it is so you can read it for yourself:
CHANGES TO ALTERNATIVELY SECURED PENSION (ASP) RULES AND RULES TO PREVENT DEVICES DESIGNED TO PASS ON TAX-FAVOURED PENSION SAVINGS
Who is likely to be affected?
1. Pension scheme administrators, members of registered pension schemes and their dependants, insurance companies and financial advisers.
General description of the measure
2. The provisions on membersí and dependantsí ASPs will be tightened up. There will be a requirement to draw a minimum income from a memberís or dependantís ASP fund. A higher maximum annual withdrawal from an ASP fund will also be introduced. A tax charge will be introduced where ASP funds remaining on the death of a member or a dependant of the member are transferred to the pension funds of other members in the scheme.
Preventing other devices designed to pass on tax-favoured pension savings
3. A tax charge will be imposed on those seeking to use other benefit options (for example, scheme pensions) as a means of passing on tax-favoured funds on or before the death of a member.
4. These changes will have effect on and after 6 April 2007.
5. HM Revenue & Customs (HMRC) will consult with interested parties to confirm that those members of registered pension schemes who either already have ASP funds, or will shortly be in that position, will on and after 6 December 2006 be able to reorganise their affairs to prevent them becoming liable to the tax charges imposed by the removal of the transfer lump sum death benefit facility as an authorised lump sum death benefit and by the removal of the guarantee facility for alternatively secured pensions.
Current law and proposed revisions
Alternatively secured pension changes
6. Currently, the pension tax rules permit a member of a registered pension scheme who reaches the age of 75 to continue to draw an income directly from the pension fund sums and assets in the form of an ASP. Similarly, dependants of deceased members may also go into an ASP when they reach the age of 75. There is no requirement to draw a minimum income from an ASP fund and the maximum annual withdrawal is 70 per cent of the annual amount of a comparable annuity (for a 75 year old) that could be purchased with the sums and assets in the fund. On death, any remaining funds may be used to provide dependantsí pensions. If there are no dependants then the funds may be paid to charity, transferred to the pension pots of other members in the scheme (as transfer lump sum death benefits) or in limited circumstances be repaid to the employer with a tax charge. In Finance Act 2006, an Inheritance Tax charge was introduced on ASP funds remaining on the memberís death, which applies to any funds not paid as pension benefits to a relevant dependant or to charity.
7. Changes will be made to the tax rules on membersí and dependantsí ASPs to:
- introduce a minimum income requirement of 65 per cent of the annual amount of a comparable annuity (for a 75 year old) that could be purchased with the sums and assets in the fund. Failing to comply with this requirement will mean that the scheme administrator will become liable to a 40 per cent charge on the difference between the minimum income limit and the amount paid as pension income in the year;
- increase the maximum annual withdrawal of income that is permitted from an ASP fund to 90 per cent of the annual amount of a comparable annuity (for a 75 year old) that could be purchased with the sums and assets in the fund;
- remove from the authorised payment rules the transfer lump sum death benefit option; this will impose an unauthorised payment charge of up to 70 per cent where, on the death of a member or on the death of a dependant of the member, any remaining ASP funds are transferred to the pension funds of other members of the scheme;
- remove the facility to make payments under a guarantee from an ASP fund; and
- allow charity lump sum death benefits to be paid at the nomination of the scheme administrator, where there is no member nomination.
8. The Inheritance Tax charges introduced in Finance Act 2006 on ASP funds will remain in place. The Government is considering how best to ensure the rules work and interact correctly with the new unauthorised payment provisions. HMRC will discuss this with interested parties.
9. Draft legislation has today been published, which sets out further details of these measures. It is intended to include this legislation in Finance Bill 2007. HMRC will discuss with interested parties what alternative provisions are needed for those the cases where providers currently use ASP as a means to hold in suspense the funds of members which they have been unable to trace by age 75. These discussions will take into account the need to minimise the costs of dealing with this group and also to ensure an appropriate outcome for the member.
Preventing other devices designed to pass on tax-favoured pension savings
10. The Government will introduce measures in Finance Bill 2007 to prevent other pension options, such as scheme pensions, being used as a route to pass on tax-favoured pension savings. These measures will have effect on and after 6 April 2007.
11. HMRC will consult with interested parties about the measures to be included in Finance Bill 2007 to ensure they affect only those schemes or arrangements that are designed to pass on tax-favoured pension savings.
12. These changes are included in a partial Regulatory Impact Assessment published today covering all changes to the pension tax rules. If you have any questions about these changes, please contact the Pensions Helpline on 0115 974 1600. Information about Pre-Budget Report measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk
6 December 2006
Source: HM Revenue & Customs Pre-Buget Report PBRN 13 - 6 December 2006.
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