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New rules on alternatively secured pensions allow much greater flexibility

I am currently drawing an alternatively secured pension and understand the rules have changed. What do I need to know? I have no financial dependants, although I do have adult children as well as grandchildren.

Alternatively secured pension was the name given to the type of income drawdown allowed at the age of 75 or above. The rules changed on April 6, 2011, and you will fall into the capped drawdown regime.

You will have your first income review under the new rules at the start of your next pension year but, as these rules offer more income flexibility, you can switch off your income or increase it to 100 per cent of your existing basis amount sooner if you wish.

The basis amount is intended to represent the value of a comparative single life, level annuity with no guarantee. Before April 6, the highest yearly income allowed was 90 per cent of the basis amount and the lowest yearly income allowed was 55 per cent. Therefore, even if you did not want to draw a taxable income from the pension, you were still obliged to. Income in each pension year could be changed within these upper and lower limits.

Under the new rules, as well as having the option to choose an income between 0 and 100 per cent of this basis amount, if you can meet the £20,000 annual minimum income requirement, there is the option to move into flexible drawdown and take even higher levels of withdrawals.

Under flexible drawdown, there is no limit on the amount of income that can be drawn each year. If taken to the extreme, the whole pension fund can be drawn as income in one go.

The other main change relates to death benefits. Under Asp, if a member died with no dependants, the only authorised death benefit that could be provided from the Asp fund was payment of a lump sum to charity.

On death after April 5, lump sum death benefits are now allowable. This is a significant change from the previous position on death in Asp. Any lump sum death benefit paid after the age of 75 is taxed at 55 per cent.

You have two key decisions to make. First, are you still comfortable leaving your pension fund to your chosen charity on your death or would you like to leave it, subject to the 55 per cent tax charge, to other individuals such as your children and grandchildren?

Depending on the answer to this question, you should also review the level of income you are drawing from the pension and amend it accordingly.

There are a number of factors that have an impact on this decision, such as:
How much income do you want to draw?
What is your own income tax position and is there an optimal withdrawal level?
What other assets outside of the pension could you live off if it makes sense to reduce income under the pension fund, possibly to zero?
Would you like to start making gifts to family now rather than on your death?
How comfortable are you with the level of investment risk on your fund?
What is your best prediction of your life expectancy?

Would you qualify for flexible drawdown?

Does your current scheme offer flexible drawdown?

This list is by no means exhaustive and as with most things in life, there is no one-size-fits-all solution. What is very useful with the new rules, however, is that you have quite a lot of flexibility to review your decisions and change your mind further down the line if your views and circumstances change.

Jason Witcombe is a director of Evolve Financial Planning

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