Alternatively secured pensions (ASPs) were introduced from 6 April 2006 in response to religious objections to the pooling or sharing of mortality risk in annuity arrangements.
Rather than being forced to buy an annuity at age 75, ASPs offer greater choice and flexibility for those who want to keep taking an income directly from their pension fund. It isn't suitable for all individuals as the 2007 Budget tightened up the rules on these products to make them less attractive to people who wanted to try and pass on as much of their pension fund as they could to their family. When you die, your pension fund can only be used to provide income for your dependants, or be paid as a lump sum to a registered charity. There may be an Inheritance Tax charge on the fund remaining at your death.
The good thing about ASPs is that you can avoid buying an annuity, and control when you take your income and how much - within Government limits set by the Government Actuary's Department (GAD). You must take at least 55% of the yearly pension that GAD decides someone in good health could get from an annuity bought on the open market, and you can take a maximum of 90% of that amount. Any shortfall will be liable to a 40% tax charge, which is levied on the plan.
You can use ASPs simply to defer buying an annuity rather than deciding against buying one completely.
The drawbacks of ASPs include:
- When you die, your pension fund can only be used to provide income for your dependants, or be paid as a lump sum to a registered charity. There may be an Inheritance Tax charge on the fund remaining at your death.
- ASPs are excepted from the general rule that a guaranteed pension may be paid for up to 10 years, even if you die before that.
- From 6 April 2007, the Government has taken action to prevent ASP funds passing tax-effectively to non-dependants (typically adult children working in a business) in the form of a pension scheme. There was a lot of interest in this following the investment restrictions on self-invested pension plans (SIPPs) introduced in the 2006 Finance Act. Any such payment would now be unauthorised, and could be subject to a tax charge of over 80%.
As we said before, this type of product doesn't suit everybody so it's really important you speak to your financial adviser.
Next steps
If you'd like more information about the choices available to you at retirement, you should talk to a financial adviser in the first instance.
Further information... Who should I talk to?
Speak to your financial adviser to find out more. If you don't have an adviser, the IFA Promotion Service or the Society of Financial Advisers can help you find one.
