Scheme spirit

As outlined in the pre-Budget report last October, the loophole that allowed scheme pensions to pass on assets on the death of one member to other scheme members free of IHT and unauthorised payment charges is to be closed.

A measure in the Finance Bill will mean that for any scheme with fewer than 20 members that does not increase benefits for all remaining members at the same rate after the death of a scheme member will incur the same punitive tax charge as alternatively secured pensions.

Scheme pensions are an option normally only available through small self-administered schemes and some Sipps, allowing for multiple members of one scheme to pool their assets.

This means that, on the death of one member, the surviving beneficiaries can benefit from the deceased’s pension savings.

The new measures come into effect from April 6 and any assets contributed into a scheme pension by a member who dies after this date will be subject to a potential tax and unauthorised payment charge of 82 per cent.

Standard Life senior pensions policy manager Andrew Tully says: “This is a logical move that brings scheme pension inheritances into line with alternatively secured pensions. This creates a level playing field for Asp and scheme pensions. However, the tax rate of 82 per cent applied to inheritances under both seems unnecessarily punitive and will not do anything to encourage more pension savings.”

But despite some industry commentators predicting the death of the small family pension, providers insist there are still valid reasons for using a scheme pension arrangement.

Rowanmoor Pensions have been keen to highlight the options of scheme pension in the past, both for small self-administered schemes and through its family Sipp, the Family Pension Trust.

Director of consultancy David Seaton says: “Scheme pensions remain a fundamental tool in personal financial planning for the high-net-worth individual.”

Another provider which sees a future for scheme pension is Sipp and Ssas specialist Hornbuckle Mitchell.

Between the announce-ment of the Government’s intention last year and this year’s Budget, Hornbuckle Mitchell launched its flexible income pension plan or Fipp. This new product offers all the usual options available to Sipp investors, including the option of moving to income drawdown and Asp, but also includes the option for scheme pension.

At the launch, Hornbuckle Mitchell managing director Neil Marsh said scheme pension offers retirees past the age of 75 the option of control over investments without the limits on income that Asp entails.

Marsh said: “Scheme pension may allow them to continue drawing a higher income while maintaining the flexibility to reshape that income to changing circumstances such as the onset of illness where it could offer better returns than would be available from an impaired life annuity.”

As scheme pension is tailored to the individual’s circumstances and is not governed by the Government Actuary’s Department, there is no set upper limit for the income taken. This means that high-net-worth clients who want to take income at a higher rate than allowed by Asps can benefit. As the rate of income allowed under Asps reduces to 90 per cent of that set by GAD at age 75, the benefit of a rate of income tailored to individual circumstances can be dramatic for those with bigger pension funds or reduced life expectancy.

Hornbuckle Mitchell marketing director Mary Stewart says: “If you have got a large amount of money in your fund after the age of 75, in an Asp you cannot get it out, no matter how hard you try.”

In addition, because of the higher rates of income allowed, anyone in danger of breaching the lifetime limit for pensions can use the higher rates of income to reduce the value of their pension below the lifetime limit.

Seaton says: “Clearly, the message is that after the age of 75 you must draw as much pension as possible. The scheme pension allows just that and permits trustees to provide a 10 year guarantee, unlike an Asp where no guarantee is available.”

Hornbuckle Mitchell agrees that the 10 year pre-determined payment term is another unique selling point for scheme pension.

Stewart says: “The 10-year predetermined term is similar to a guarantee but obviously the level of payment is determined by the level of the investment return. But if a member dies part the way through the income continues to be paid to a dependent or to another beneficiary as the members see fit.”

But Stewart says the ability to vary the level of income to an individuals circumstance remains the most appealing reason for taking out scheme pension. And despite the unwelcome level of tax and charges levied on any remaining assets, Stewart says if scheme pension is used properly, and the level of income is adjusted every three years, as is permitted, then there should be very little left in a pension to incur the new higher charges.

Stewart says: “If you get it right, then there will not be much. if anything, left to incur the tax and charges.”