ASP changes amount to 'legalised theft'

The changes to alternatively secured pensions announced in the Pre-Budget Report "smacks of legalised theft", according to AJ Bell Group.

In a communication sent out to advisers after last week's announcement, Andy Bell, managing director of A.J Bell, suggests the introduction of a tax rate of “between 80% and 90% on ASP funds on death would make even Dick Turpin blush”.

Although he welcomes the introduction of a minimum income level of 65% and an increase in the maximum income level of ASPs to 90% of a comparable annuity for a 75-year-old, he says the proposed tax treatment of funds left in ASP after a member dies is “frankly ludicrous”.

And Bell points out, although the government says the changes will result in a tax charge of up to 70%, he suggests the charge could be much higher when combined with the Inheritance Tax (IHT) treatment of ASPs announced in the Budget in March.

Bell argues that while the interaction between the IHT charges and the new rules will be consulted on, he says the principles seem quite simple in that when a member and their spouse or dependents die, the remaining fund will be liable for IHT.

But under the new rules announced last week which removed the ability to Transfer Lump Sum Death Benefits, if this remaining fund is then reallocated to other members of the pension scheme, the reallocation will be subject to 70% tax.

This will be made up of a 40% unauthorised payments charge, a 15% unauthorised payments surcharge, and a 15% scheme sanction charge, but Bell says applying all of these taxes together, including IHT, means the remaining funds could lose 82% in tax, and he warns if the de-registration threshold for the scheme has also been reached, there could be a further 40% tax charge which brings the total tax treatment closer to 90%.

Bell says: “This, quite frankly, is ludicrous. What is also ludicrous is that once again, the government’s ill-judged legislation will distort the actions of advisers and encourage what will undoubtedly be seen as abuse.”

As an example, Bell points out why would a 75-year-old sit around with a pension fund, “waiting for his 80% plus tax charge to bite”, when they could cash in the fund and pay it to the kids or even spend it, as although he admits in most cases this could trigger a 70% tax charge he points out the member would avoid IHT.

Bell continues: “We will be making representations at the highest level to ensure this proposed legislation does not see the light of day. We will instead be suggesting the government introduces a one off 55% tax charge on lump sum death benefits paid directly to beneficiaries from an ASP fund.”

And John Moret, sales and marketing director at Suffolk Life, says although the company is not surprised by the “heavily trailed announcement”, he says he is disappointed at the government’s seemingly “knee-jerk reaction” to the issue of ASPs.

He says: The government have not only introduced further complication into the mechanics of operation of ASP, but have also effectively repeated their U-turn on residential property investment by introducing a similarly penal tax regime for ASP.”

Moret argues an unauthorised payment charge of up to 70%, coupled with a potential IHT charge, is effectively taxing death benefits under ASP to a level which is quite “disproportionate with the position on death prior to age 75”.

And he adds: “Those individuals who have already entered into ASP and those who have invested into pension contracts since A-Day with ASP in mind have been short-changed and the proposals suggest a knee-jerk reaction.”

However, Ian Westwater, from the wealth management division at Abbey, says the changes are the least which could have been anticipated, and points out they ensure ASP is now seen as a clear alternative to an annuity rather than an investment vehicle to pass wealth on to future generations.

Westwater also welcomed the announcement by the chancellor suggesting legislation will be introduced to prevent other options, such as scheme pensions, being used to avoid IHT on pensions, although he suggested the move would be “criticised by those providers who have been actively marketing the ‘family self-invested personal pension’ concept, but should hopefully be seen by others as being a reasonable compromise”.

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