Taking benefits before age 75
Conventional pensions and annuities remain an option. But income can be drawn from the fund as what is referred to as unsecured income. Maximum unsecured income in any year is broadly 120% of the annual income which could be paid if the fund were used to buy a level annuity on the open market. But the calculation is made based on factors published by the Government Actuaries Department (GAD). The GAD factor applies to the members fund determines the "relevant annuity" and the maximum unsecured income is 120% of the relevant annnuity.
The minimum unsecured income in any year is Nil.
The relevant annuity must be recalculated every 5 years.
When a the recipient of unsecured income dies before age 75, any remaining fund may be repaid as a capital sum subject to tax at 35%.
Take me to HMRC guidance on unsecured income
Securing benefits from age 75
By age 75, income must be secured for life. Pension income may be delivered after age 75 through an Alternatively Secured pension (ASP). ASP may not start before age 75. The maximum income is 70% of that which could braodly be generated by applying to the fund an annuity rate for the member's age and sex up to age 75. That is 70% of the relevant annuity (see above). But see below regarding the December 2006 prebudget report announcement of proposed changes to ASP.
The maximum income is reviewed annually. The GAD rate for a 75 year old will always be used to calculate the relevant annuity (see above) irrespective of the age of the individual .
The minimum income to be taken in any year is nil. On death any remaining fund underlying ASP must first be used to provide unlimited dependants' pensions. Any remaining fund reverts to the scheme, where it may be re-allocated to provide pension benefits for other members or possibly paid to a registered charity. But see below regarding the December 2006 prebudget report announcement of proposed changes to ASP.
This for the first time led to the possibility of intergenerational pension transfers - but IHT may arise.
Following the publication of the December 2006 pre budget report there are to be further changes to ASP. Click here to read our newsletter which details the Governments proposals. And click here to read the PBR propsals in detail.
We do at this stage see an ongoing role for ASP despite these unwelcome proposals.
Our initial thoughts include :
1. ASP can be seen now as a further annuity deferral option - say you are aged 75 in good health as is your spouse. So you decide to use ASP (the proposed 90% of relevant annuity rule helps a lot here) - you grow the fund further in its tax efficient shelter and decide to buy an annuity later. Which then becomes secured income and then include a long guarantee period. You may decide to buy annuity say at age 80 or 85 - or use the fund on the members death to buy an annuity for the surviving spouse with the full remaining pot. The left over fund on the death of the dependant is zero
2. Use a life insurance policy to replace the lost pot on death during ASP