What is Alternatively Secured Pension (ASP)?
Alternatively Secured Pension (ASP) works in a similar way to an Unsecured Pension, in that it allows you to take an income from the pension fund without having to purchase an Annuity.
The right to take a tax free lump sum, now known as the Pension Commencement Lump Sum (PCLS), is lost after age 75. Therefore, regardless of whether you have taken a PCLS or not, the balance of your pension fund remains invested.
When can it be used?
At age 75 and above, the way in which you can draw a pension income is limited to ASP and Lifetime Annuity. Unsecured pension is not an option.
If you wish to take an income but for whatever reason, you decide that you’re not ready to buy a Lifetime Annuity then ASP can be used.
ASP can be used for those that require a more flexible income than through the Secured Pension route, for example, Lifetime Annuity.
Pension funds are invested in a similar way to an Unsecured Pension and therefore the same risks will apply. You can take an income direct from your pension whilst the fund remains invested.
Having implemented an ASP, the fund can still be used to purchase an annuity at any time.
There are some notable differences between ASP and Unsecured Pension, as follows:
- A minimum income of 55% of the amount allowable under Unsecured Pension must be taken
- The maximum income is 90% of the maximum allowable under Unsecured Pension
- The income level must be reviewed annually
Your pension provider or Adviser calculates the maximum and minimum income level you can take, and you can withdraw any amount within the upper and lower limits.
In the event of death whilst taking an ASP, any remaining invested fund must be used to either:
- Provide a spouse or dependant aged over 75 with an ASP
- Provide a spouse or dependant aged under 75 with an Unsecured Pension
- Provide an annuity for a spouse or dependant
- Provide a charity lump sum death benefit
- Provide a transfer lump sum death benefit (where there is no spouse or dependant)
A Charity Lump Sum Death Benefit will not attract Inheritance Tax. A Transfer Lump Sum Death Benefit can be paid to other members of the same scheme (if a group scheme has been established) and will be subject to Inheritance Tax and other substantial tax charges.
Potentially provides a death benefit whenever death occurs. Under secured pension options, the best that can be offered is a 10 year guarantee. Capital protection is not available once age 75 had been reached.
Greater income flexibility than the secured pension options. Could be valuable if the aim is to conserve funds until the maximum draw or Lifetime Annuity purchase is needed to meet nursing care costs.
Can switch from Alternatively Secured Pension to Lifetime Annuity, but the opposite is not possible.
Meets the requirements of some religious groups who have ethical objections to the mortality cross-subsidy in annuities.
Tax-efficient way to make substantial charitable gifts.
Can be used to pass pension scheme assets between generations.
There is no security of income. Capital loss and falling income remain a real possibility.
At age 75, the maximum income will be about 70% of that available from the secured pension option.
As an individual ages, this gap will widen because the Alternatively Secured Pension review always uses calculations for someone aged 75.
Requires annual reviews, which add to advice and administration costs in comparison with secured pensions.
The effect of mortality drag is high (and will increase) because of the advanced age.
In theory, it requires a relatively high risk investment strategy which is unlikely to appeal, or be suitable for, people over age 75.
The complexities may become increasingly difficult for an ageing individual to understand.
In HMRC’s view, Alternatively Secured Pension is a solution to the provision of retirement income for certain religious groups, not an estate planning tool for the pension-rich.
In practice Alternatively Secured Pension is unlikely to be as attractive an option as it first seemed. As a financial planning tool, it is most suited to individuals who:
- Have a limited or no need for income from the funds. Typically this will be because they have other sources of income, including other pension provision
- Have a significant level of funds available to place into Alternatively Secured Pension
- Want to pass pension fund assets on to other members of their pension scheme
- Want to gift their pension fund to their chosen charities
- Are uncertain about their health and/or their spouse’s/dependant’s and do not want to commit to a Lifetime Annuity
- Are prepared to take significant investment and mortality risk
- Are willing to undertake a plan of considerable complexity where the costs of administration and advice are likely to be high
Making the decision on how to take an income from your pension fund requires careful consideration and full knowledge of all the options available to you.
We have a number of additional resources for you to help you make a decision.
We firmly believe that when considering such an important area of your financial planning Independent Financial Advice is crucial. At Investment Sense we offer initial meetings with no cost or obligation, we will prepare a report into your options and present it to you, allowing you to make an informed decision
Should you wish to make an enquiry or receive advice please complete the enquiry form on this page or contact us on 0845 074 7778.