The Annuity Alternative
MoneyWise Autumn 2006
For some people – like Plymouth Brethren – buying an annuity is against their religion. A number of other investors coming up to retirement also object to being forced to buy an annuity when they want to draw benefits from their pension. They don’t like the inflexibility, the apparently low returns or the position when they die.
Of course, annuities do have their advantages. They can provide a really secure income and they are normally guaranteed to last as long as you live. In fact they can be regarded as a type of insurance against living too long. The new pension simplification regime introduced this year abolished the requirement to buy an annuity by age 75. Unless you have already bought a lifetime annuity, or something very like it called ‘a scheme pension’, at age 75 you can now:
- Either buy an annuity or a scheme pension,
- Or switch to an ‘alternatively secured pension’ (ASP). This alternatively secured pension is a restrictive form of pension fund withdrawal:
- The maximum you can withdraw is about 70% of what an annuity could provide at age 75. If you do not need the income, you can choose to withdraw nothing at all and leave your fund to build up.
- These maximum withdrawal rates are reviewed every year (though they are always based on age 75), so your income could fluctuate, particularly if your drawings over time have been relatively high. The low level of withdrawal and frequent reviews are designed to prevent rapid erosion of your pension fund, although this cannot be guaranteed. ASP is not for you if you are unprepared to accept investment risk and/or would be heavily reliant upon the ASP income. One reason why increasing numbers of people are choosing the ASP route is the treatment of the death benefits. What you are allowed to do depends crucially on whether you have any dependants alive at the date of your death. ‘Dependant’ in this case means spouse, civil partner or someone who is basically financially dependent on you.
- If you die leaving any dependants, then the remaining ASP fund must be used to provide an income for at least one of these dependants. The dependant could take his or her benefits by fund withdrawals or ASP, so that when the dependant dies, there could also be some funds available. If there are more dependants left, they can continue drawing benefits, otherwise the remaining funds are treated as below.
- If you die leaving no dependants whatsoever: a) Your residual fund could be transferred to other members of your pension scheme, for example your children, whom you can nominate. This fund would be liable to inheritance tax. b)The fund could be paid to any charity you nominate, free of inheritance tax.
Most leading pension providers are now offering ASP arrangements. It is essential to get advice from a specialist and, most importantly, a full assessment of whether ASP could be the right option for you.
