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Drawing your pension benefits - the big decision

MoneyWise Spring 2007

Your pension fund may be your biggest single investment. So how you draw the benefits is a really key decision. There are several possibilities.

Alternatively secured pensions (ASPs) were introduced in April 2006 as a new way of drawing income from your pension plan once you have reached age 75. One of their most attractive features was that you could bequeath any ASP fund remaining on your death to other nominated pension scheme members, who could include your children or grandchildren. The government has announced that it will be using tax penalties to close down this estate planning option.

The ASP remains available as an alternative to an annuity, but its appeal has been substantially reduced by the change to the tax rules.

Fortunately, there are still other ways in which you can use pensions as part of estate planning. For example, if you buy an annuity at age 75 instead of choosing ASP, you can arrange for the annuity payments to be guaranteed for a fixed term of up to ten years.

If you die within the guarantee period, the outstanding payments can be made to whomever you nominate. However, the discounted value of those payments will normally count as part of your estate for inheritance tax purposes.

Alternatively, if an annuity provides you with excess income, then you can usually give this away on a regular basis free of inheritance tax under the normal expenditure rule. The gift does not have to be made direct to your beneficiaries.

One practical way of using the normal expenditure exemption would be to use the excess income to pay premiums under a life policy. This can be placed under trust for your beneficiaries — and thus outside your estate.