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6. Alternatively Secured Pension

How does it work?

This option was introduced following the new pension rules introduced on 6th April 2006. The primary aim was to provide an alternative for people who do not wish to purchase an annuity on religious grounds. The benefits are far more wide-ranging as it is becoming more and more common for people over the age of 75 to have an interest in actively managing their investments.

Alternatively secured pension works in much the same way as unsecured income. The last opportunity to take tax-free cash is at age 75 and after this date, it is possible to take income withdrawals up to a maximum limit. Again, the minimum income level is nil and the maximum level is dictated by rates produced by the Government Actuary Department. Income levels will be reviewed annually, however, the rate used will be based on that applicable at age 75 rather than actual age.

Investment Strategy & Management

This can continue in much the same way as that applicable for unsecured income. Where income is being taken it will be important that a strategy is implemented to satisfy ongoing income requirements, alternatively, there may be an overriding aim to preserve capital with a view to providing benefits for nondependant partners or relations.

What happens in the event of death?

After the age of 75 it is not possible for lump sum death benefits to be paid. If there are dependants remaining the fund must be used to provide pensions for them, these payments can be made as annuity payments or unsecured income if the recipient is under the age of 75. If they are over 75 benefits must be paid as an annuity or alternatively secured pension. Alternatively secured income payments can be guaranteed for ten years and therefore income may continue for the remainder of this period. The income payments cannot be commuted and paid as a lump sum.

If there are no surviving dependants’ the remaining fund can be paid to a charity nominated prior to death. The payment will be made without suffering any form of death tax or inheritance tax. The other option is for a lump sum transfer benefit to be paid. These payments can be made to other people who are members of the same pension scheme; it will be possible to nominate these recipients prior to death. If this option is selected the value of the pension fund will be incorporated into the estate and subject to Inheritance Tax.

Taxation

  • Income withdrawals are subject to income tax.
  • Inheritance tax may be levied if a lump sum payment is made to another pension scheme.
  • When tax-free cash is taken at outset and not utilised, it may be included in the value of your estate and therefore increase any potential inheritance tax charge.

Advantages

  • You are able to take the full tax-free lump sum entitlement at outset.
  • The pension funds from which you take income withdrawals remain invested, therefore you retain control of your investment portfolio and potentially benefit from the growth provided by the investments selected.
  • It gives the flexibility to either phase and/or defer annuity purchase.
  • Income may be varied, between set limits, to suit your personal circumstances.
  • The facility to vary income levels may provide scope to mitigate your personal liability to income tax in certain years.

Disadvantages

  • Future investment returns are not guaranteed and the value of the pension fund may fall. This may therefore result in a lower total income than if an annuity was purchased at outset.
  • Annuity rates may be lower in the future. As a result, the eventual annuity may be lower than the annuity that would have been available at outset.
  • High withdrawals of income may not be sustainable during the income withdrawal period and may also reduce the amount of any potential annuity.
  • The higher the level of income withdrawal chosen, the less that may be available to provide for dependants, particularly when the original fund is small and/or investment returns are poor.
  • Increased flexibility brings increased administration costs. Charges are likely to be higher than those relating to the purchase of a conventional annuity and may increase in the future.
  • It is possible that the level of income selected at outset may need to be decreased or increased to comply with new limits arising from an annual review.

For whom might Alternatively Secured Pension be suitable?

  • Those who need the maximum tax free cash but do not require all the income that an annuity would provide.
  • Those who are not entirely dependent on the income from the pension plan and can therefore afford to see fluctuations in its level.
  • Those who understand the degree of risk involved and can afford to take such risks because, for example, they have substantial investments outside the pension plan.
  • Those who do not wish to purchase an annuity for religious reasons.
  • Those who do not wish to be “locked” into buying additional benefits that are not required. For example, some pension schemes require a widow(er) pension to be purchased, which will be of no benefit if there is no spouse, or the spouse is in poor health.

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