Alternatively secured pensions

Over-75s face death taxes on pensions

Alternatively Secured Pensions (ASP) - schemes that investors enter into at age 75 if they decide not to buy an annuity - potentially offered an attractive route for people to safeguard remaining pension funds for their families when they died.

Under the original ASP rules, spouses, civil partners and financial dependants could receive assets held within an ASP free of inheritance tax (IHT). In addition, individuals could bequeath their ASP assets to others and these assets would then form part of their estate for IHT purposes.

Now any ASP funds remaining on death will suffer tax charges of up to 70 per cent, on top of any IHT liability. Family members can only expect around 18 per cent of the remaining pension pot if IHT is due. Only spouses, civil partners and financial dependants such as young children will be able to inherit pension assets free of tax, although ASP assets can be bequeathed tax-free to charities.

The question is - are there any alternatives for investors who want to leave surplus pension savings to the next generation but cannot stomach the tax charge?

One alternative could be to take out the maximum possible income from your pension fund during your lifetime and use this to fund other insurance or investment policies, such as whole of life insurance or offshore bonds.

Since the "A-Day" pension rules were introduced last year, investors have been able to draw an income directly from their pension fund, and retain control over the remaining pot, rather than having to hand the entire amount over to purchase an annuity at age 75.

A positive effect of the Budget changes is that the maximum amount of income you can take post age 75 - when you switch into ASP - has been increased from 70 per cent to 90 per cent of a benchmark annuity, allowing investors to draw more money from their pension.

Another option set to become more popular is extracting income from your pension and paying it into an offshore bond. An offshore bond has the advantage of being an efficient IHT planning tool if it is set up under a suitable trust. Combining this with the tax relief received on pension payments could bring attractive rewards.

To make this work you may build up funds within a pension, and benefit from the initial upfront income tax relief on contributions. On retirement you could take 25 per cent of your pension tax-free and invest it in an offshore bond. Then each year take the maximum income allowable from your pension and add some of this to the bond. This money will roll up tax-free offshore. Your dependants will however face an income tax charge when the funds are brought back onshore after you die. However, careful tax planning can limit this to 20 per cent, even for higher rate taxpayers. The funds are not liable for IHT when brought back onshore.

Another advantage of using an offshore bond is that you still have the option to fall back on the money in your lifetime, should your situation change.

If these options sound complicated, you could always give your pension income straight to your children while you are alive. Provided you can show HM Revenue & Customs that you have surplus income to requirements, you can give this away without it being subject to IHT.

If the threat of the tax charge is enough to propel you into taking an annuity, then at least you now have more flexibility as to when you can buy it.

Pension companies are also working to create new "halfway house" annuities, which might combine some guaranteed income with the potential to benefit from further investment returns should markets outperform.

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