The pensions industry is lobbying the Treasury in a last-ditch effort to persuade the government not to axe Alternatively Secured Pensions, the new vehicles which allow investors to avoid purchasing an annuity at retirement.
Ed Balls, the economic secretary to the Treasury, has signalled that the government will use the pre-Budget Report to prevent ASPs from being used as tax avoidance measures. Pension providers fear that this will entail the outright abolition of ASPs, which were introduced as part of the “A-day” pension reforms in April.
Before April, anyone with a personal pension had to use the fund’s assets to purchase an annuity by the age of 75. An annuity guarantees a set level of income for life. But this rule was unpopular with pensioners, as annuity rates have deteriorated in recent years. The best annuity rates for a 75-year-old now barely reach 10 per cent, or £10,000 a year per £100,000 invested.
The Treasury has received a stream of letters from pension providers including Standard Life and Winterthur; financial advisers including Hargreaves Lansdown and Mattioli Woods; the Association of Member Directed Pension Schemes; and the Retirement Income Reform Campaign led by Oonagh McDonald, the former Labour MP and frontbench Treasury spokeswoman. All are urging reform rather than abolition of ASPs. Hargreaves Lansdown has also collected 7,000 names on an internet-based petition.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “They’re just refusing to engage with the issues, saying ‘we don’t want this to be a concession for the wealthy’.”
The proposed reforms aim to address the government’s concerns that ASPs will reduce its tax take. This is because income from annuities is subject to income tax, but holders of ASPs can choose not to draw any income from them, thus reducing the amount of income tax they pay.
In response to one letter, Sanjay Wickramasinha, a Treasury official, wrote: “The government did not introduce ASPs to provide a means by which a small and wealthy minority could benefit substantially from tax advantages to the cost of taxpayers overall. ASP is not intended as a mainstream product.”
As a concession, the pensions industry is suggesting the introduction of a minimum annual income withdrawal from ASPs, generating income tax.
However, the Treasury is also concerned that ASPs provide a less secure form of income than annuities, as an ASP could be invested in risky assets and hit investors’ retirement incomes.
The Treasury argues that ASPs were introduced to cater for the beliefs of the Plymouth Brethren, a small Christian sect which objects to insurance. The Treasury is understood to have received legal advice saying that restricting access to ASPs on religious grounds would fall foul of European Union laws on equal rights.
The pensions industry has in the past few months launched marketing campaigns for ASPs to encourage their widespread take-up.
A Westminster lobbyist said Mr Balls and Gordon Brown, the chancellor, felt they were “having their noses rubbed in it” by seeing wealthy pensioners using ASPs to pay less income tax and increase the amount they can pass to their heirs.
Ed State, a Conservative party press officer, said the handling of ASPs was “chopping and changing through bad legislation”. He said: “This increases the instability of the pensions regime, which is the last thing people need.”
He added: “We’re surprised that [Balls] is surprised at the way other people are trying to take advantage of the tax advantages, when it was highlighted in the debate on the finance bill.”
