Some particular aspects of the new pension tax rules are beginning to catch the public's imagination. This is good news for private pensions after years of being dogged by bad publicity.
The new investment rules will – in theory at least – allow savers to invest in anything at all. There has already been talk of investing in works of art, fine wines, classic cars and the like.
But what has really captured the interest of the disillusioned retirement saver is what happens after age 75. Gone is the requirement to buy an annuity. Replacing it is the choice of an annuity or an alternatively secured pension. The ASP may sound more like a venomous snake of the type used by Cleopatra to kill herself but it could turn out to be a lot more useful.
The name is a bit of a misnomer as it is really just a continuation of income drawdown. But there are three key differences between drawdown before age 75 (called an unsecured pension) and an ASP.
The first of these is that the maximum level of income is subject to an annual review. Unsecured pensions are subject to a five-yearly review. The maximum income from an ASP is equivalent to the annual income from a single-life level annuity that the ASP fund could buy. For the purpose of the annual review, age is assumed to be 75, regardless of actual age. This means the annual review for an 80-year-old will assume they are still aged 75. The purpose of always using age 75 is to restrict the maximum income and prevent pensioners overdrawing on their fund.
The second difference also applies to the maximum level of income. Whereas an unsecured pension can pay up to 120 per cent of the single-life level annuity, the ASP can only pay up to 70 per cent. Again, this prevents the fund being exhausted too quickly.
The third key difference is that nothing can be paid outside of the pension fund on death, unless to a charity. While any remaining unsecured pension fund can be paid to dependants outside of the pension wrapper (less a 35 per cent tax charge), remaining ASP funds must first be passed to a spouse or dependant within the pension wrapper. This inherited fund is then used to buy an annuity, take unsecured income (if under age 75) or take an ASP (if over age 75). If there is no spouse or dependant on death while drawing an ASP, any residual fund can be passed to other scheme members or to a charity.
Despite appearing less attractive than paying a lump sum outside of the pension scheme wrapper, the ability to pass money to other scheme members is likely to be a real winner. If those other scheme members happen to be your children or grandchildren, the fund remaining on death (transfer lump-sum death benefit) could cascade down the generations.
This has created the concept of the family pension scheme. But this need not be a pension scheme just for members of one family. The only requirement is that any beneficiaries of a transfer lump-sum death benefit are all members of the same pension scheme. For example, the scheme could be a personal pension scheme with 100,000 members. As long as your nearest and dearest are among that number, your remaining pension fund can be passed on to them.
The ideal product to accommodate an ASP would be a self-invested personal pension. Bearing in mind that an ASP is just another form of drawdown, the ability to self-invest is almost an essential requirement. In addition, by bringing other family members into the same Sipp, funds can be pooled in order to purchase assets.
Rather ominously, rumours are circulating that the Capital Taxes Office has its beady eyes on the transfer lump-sum death benefit. Word has it that the CTO has plans to cast its inheritance tax net in that direction.
If true, this intrusion would be most unwelcome. Funds received from a transfer lump-sum death benefit do not attract any new tax relief, unlike conventional pension contributions. It therefore seems unfair to subject such a transfer to inheritance tax.
Let us keep our fingers crossed that another branch of the Inland Revenue does not undo the good work of the simplification team in putting pensions back on the savings map. Otherwise, this particular ASP might turn out to have a rather venomous sting in its tail rather than its jaws.
John Lawson is marketing technical manager at Standard Life