Pensions after 75
Many people enjoy "do it yourself" pensions, more commonly known as Small Self Administered Schemes (SSAS) and Self Invested Personal Pensions (SIPP). The most popular feature of the pensions tax reforms in the Finance Act 2004 was the removal of the requirement to wind up their scheme and buy an insured annuity before the member's 75th birthday. Insured annuities tend not to be popular with SSAS or SIPP members, because of the loss of capital on death.
So members of SSAS and SIPP expected to opt for what the Finance Act 2004 called "Alternatively Secured Pension" (ASP), rather than buy an annuity at 75. Sadly, the Pre-Budget Report of 6th December 2006 introduces changes to ASP, almost before the ink has dried on the new rules. So we are told that from 6 April 2007 ASP will work as set out below.
- Maximum pension will be limited to 90% of the pension to a 75 year old (currently 70%).
- The member must draw a minimum pension of 65% of the pension to a 75 year old (currently there is no minimum).
- On death, if residual funds are reallocated to other members, this will be taxed as an unauthorised payment. The total tax could be as high as 70%. The reallocated funds remain subject to inheritance tax on the original member's estate. (Previously there was only inheritance tax).
Why another Government U-Turn? The Treasury recently stated that ASP was only ever intended for those with a principled religious objection to insured annuities, even though there was nothing in the legislation to restrict the use of ASP. Any attempt now to impose that condition would surely have constituted religious discrimination. So the sad response from Government has been to try to tax ASP out of existence, and force SSAS and SIPP members to use their funds for insured annuities.
An alternative to ASP, mainly for SSAS, is a "Scheme Pension". This still pays a pension direct from a scheme, and has some obvious advantages over ASP, such as no percentage restriction on the pension. It could remain useful in limited circumstances, but unfortunately, the Pre-Budget Report tells us that the Scheme Pension rules, too, will be amended to prevent them being used to reallocate pension funds tax-efficiently on death. This will prove a difficult area to legislate, because Scheme Pension is also the method by which pensions are paid to members of larger defined benefit schemes.
The tax on reallocations is likely to discourage all bar the most keen annuity avoider from using ASP or Scheme Pension in the long term once they reach age 75. If passed, this legislation would be a bizarre end to a popular reform which was introduced by this self same government only twelve months ago! In fact, the tax take for the Treasury from ASP would have been greater than it is from annuities. This suggests an old fashioned attempt to "soak the rich", rather than a reform to prevent tax abuse. It also presents some headaches for those planning retirements for SSAS and SIPP members!
The Government is mistaken if it thinks this will be the end of the matter. Human nature means that those who have taken the trouble to save for their retirement will want the right to manage their own savings. The Government can expect campaigns against the new restrictions. If nothing else, the application of these nonsensical rules from age 75 will be challenged. The Government's suggestion that dying after 75 is somehow "unauthorised" is absurd.
Barnett Waddingham LLP, December 2006.