In the pre-Budget report last December, the Government signalled that it wanted to stop people using alternatively secured pensions as a vehicle for passing money on to family. It then went further by confirming it would also put in place rules to stop scheme pensions being used to bequeath funds to family.
The Asp changes were included in this year’s Finance Act but there were no similar provisions dealing with scheme pensions. Is there now an uneven playing field between Asps and scheme pensions and will people look to exploit this?
Scheme pensions are often used by small self-administered schemes although other types of scheme such as Sipps could probably do the same thing. They work by paying a pension directly from SSAS assets rather than applying the assets to buy an annuity. On death, if there is any residue left over from the fund allocated to support the scheme pension payments, this can be reallocated to other members of the SSAS, who are often family members.
Passing on such big amounts (which were left over even on the reasonable basis of a scheme pension paid at the level of an open-market annuity) looked like the Revenue was being excessively generous. Yet some providers have suggested this reallocation is not an unauthorised payment and so will not be hit by the 70 per cent tax, as happens within Asps. Even better, the amount reallocated is not caught by the inheritance tax rules applying to Asp residues.
The most straightforward route was for the Government to ensure a level playing field between Asps and scheme pensions by imposing similar pension tax and IHT charges. Any decision which allows scheme pensions to operate in a more tax-efficient way than Asps will inevitably mean other providers will come under commercial pressure to offer clients the same facility. More providers offering a facility which allows pension funds to be passed to family will probably lead us full circle to a further Treasury-led change in the near future.
Where does this leave us? The Government said it would ensure that pension funds could not be passed on to connected people in any way in the pre-Budget report. Yet at first glance, it appears that a scheme pension is still a much more tax-efficient way of passing on pension funds to family than Asps, as no legislation was forthcoming in the Finance Act.
The simplest solution was to ask the Revenue to explain its position. While confirming its desire to prevent scheme pensions being used for inheritance planning, the Revenue explained it is working out the best way to do this to try to prevent any unforeseen consequences to legitimate contracts, such as annuities, where money is pooled.
Crucially the Revenue went on to say that when the changes to scheme pensions are introduced, the “provisions will apply to all existing arrangements that have been put in place that will enable capital to be passed on death to connected persons” except where the member or dependant dies before they are introduced.
In other words, unless you can be sure you will die before the Government gets around to introducing the scheme pension changes, penal tax charges will apply to scheme pensions where money is passed onto family members.
Despite the lack of legislation in the 2007 Finance Act, it is clear that there is an even playing field between Asps and scheme pensions. Neither can be used to pass on money to family tax-efficiently.
John Lawson is head of pensions policy at Standard Life