Brown sits on ASP

The Chancellor has killed off the use of alternatively secured pensions (ASP) to pass capital down the generations by restricting the people to whom funds may be passed and imposing a minimum income withdrawal.

The Treasury wanted the use of ASPs, which apply after age 75 for people who don't want to buy an annuity, to be restricted to those with religious objections to the pooling of mortality risk. However, it has been unable to put such limits in place - regarding them as impractical.

Instead ASPs have been hedged round with limitations. From 6 April 2007 those in ASPs will be forced to take income of at least 65% of the comparable annuity rate for a 75 year-old, up to a maximum of 90%. This will severely limit the amount left to pass onto any heirs.

Those who fail to take the minimum income will face a charge on the difference between the actual income drawn and the minimum amount.

However, the Chancellor has gone further by removing transfer lump sum death benefits from the authorised payment rules. This means that on the death of a pension scheme member any remaining ASP funds can only be used to pay dependants' pensions, given to a charity or in limited circumstances paid to an employer. Any other payment will face an unauthorised payment charge of up to 70%.

The Inheritance Tax charges introduced in Finance Act 2006 on ASP funds will remain in place. The Government will be consulting with interested parties on how best to ensure the changes to the ASP rules are workable and that they interact correctly with the new unauthorised payment provisions. The changes will apply both to members and dependants.

What this means is that the Government has effectively put a stop to creative tax planning through family SIPPs so that any transfer within a 'family SIPP' is likely to be an unauthorised payment with significantly adverse, and therefore costly, tax consequences.

Ian Greenstreet, Pensions Partner at Nabarro Nathanson, said, "Anyone who has set up a family SIPP to pass tax savings on assets down to members of a family SIPP should review the provisions as a matter of urgency and consider whether it is still appropriate to operate a drawdown arrangement after the age of 75.

"The new provisions apply on all deaths on or after April 2007. If someone in receipt of alternatively secured income dies between now and April 2007 and any unutilised assets are reallocated to someone else in the pension scheme, it may be possible to escape the new penal tax charges."

Back to Pre-Budget 2006