Client questions

Alternatively Secured Pension (ASP) was the name given to the type of income drawdown allowed at age 75 or above. The rules changed on 6 April 2011 and you will fall into the Capped Drawdown regime.

You will have your first income review using the new rules at the start of your next pension year but as these new rules offer much more income flexibility, you can switch off your income, or increase it to 100% of your existing “basis amount” sooner if you wish.

This basis amount is intended to represent the value of a comparative single life, level annuity with no guarantee. Prior to 6 April 2011, the highest yearly income allowed was 90% of the basis amount and the lowest yearly income allowed was 55% of the basis amount. Therefore, even if you didn’t want to draw a taxable income from the pension, you were still obliged to. Income in each pension year could be changed within these upper and lower limits.

Under the new rules, as well as having the option to choose an income between 0% and 100% of this basis amount, if you can meet the £20,000 p.a. “Minimum Income Requirement”, there is the option to move into Flexible Drawdown and take even higher levels of withdrawals.
Under Flexible Drawdown there is no limit on the amount of income that can be drawn each year. Indeed, if taken to the extreme, the whole pension fund can be drawn as income in one go.

The other main change is in relation to death benefits. Under ASP, if a member died with no dependants, the only authorised death benefit that could have been provided from the ASP fund was payment of a charity lump sum death benefit.

On death after 5 April 2011, lump sum death benefits are now allowable under the new rules. This is a very significant change from the previous position on death in ASP. Any lump sum death benefit paid after 75 is taxed at 55%.

Therefore, you have two key decisions to make. Firstly, are you still comfortable leaving your pension fund to your chosen charity on your death or would you like to leave it, subject to the 55% tax charge, to other individuals such as your children and grandchildren? Depending on the answer to this question, you should also review the level of income that you are drawing from the pension fund and amend it accordingly. There are a number of factors that impact on this decision, such as:

• How much income do you actually want to draw?
• What is your own income tax position and is there an optimal withdrawal level?
• What other assets outside of the pension could you live off if it made sense to reduce income under the pension fund, possibly to zero?
• Would you like to start making gifts to family now rather than on your death?
• How comfortable are you with the level of investment risk that you are taking on your fund?
• What is your best prediction of your life expectancy?
• Would you qualify for Flexible Drawdown?
• Does your current scheme offer Flexible Drawdown?

This list is by no means exhaustive and as with most things in life, there is definitely no “one size fits all solution”. What is very useful with the new rules, however, is that you have quite a lot of flexibility to review your decisions and change your mind further down the line if your views and circumstances change.

Evolve - June 2011