In April this year, when the new A-day pensions regime came into force, one of the most anticipated changes by many investors was the introduction of the Alternatively Secured Pension. With one fell swoop, one of the most disliked elements of the old pensions regime – the requirement to purchase an annuity with your pension fund – was removed.

In return for the payment of a lump sum – often your pension pot – an annuity provides a guaranteed income for the remainder of your life. But annuities have proven unpopular with many pension savers as they require them to kiss goodbye to their pension money.

The ASP allows pension investors to draw an income directly from their pension as well as maintain investment control over their pension assets right until death. A further attraction of these schemes is that they allow investors to pass on pension assets at death.

But ASPs have hit the headlines in recent weeks following comments that the government “was examining how to restrict ASPs to their original limited purpose”. The main reason ASPs were introduced was because the Plymouth Brethren, a religious body against insurance, lobbied heavily for the new freedoms.

So what exactly is an ASP how does it work?

Under the old rules that disappeared on April 6, investors in vehicles such as personal pensions had to purchase an annuity with their fund by age 75 at the latest.

Under the new regime, this requirement has been abolished. You can still purchase an annuity with your pension fund if you wish. But, as an alternative, you can have your pension fund assets transferred into an ASP.

ASPs are offered by many pension companies and are similar to income drawdown schemes (now called unsecured pensions) which allow investors to draw an income directly from their fund but at the same time allow them to control their pension.

There are some crucial differences with the ASP. First, an ASP can only be taken out on your 75th birthday.

Second, the levels of income that you can draw from an ASP are more restrictive than with an unsecured pension.

With an unsecured pension, you can withdraw between 0 and 130 per cent of an income benchmark determined by the Government Actuary’s Department, roughly equivalent to the income you would have got had you bought an annuity on the open market.

With an ASP, these income restrictions are between 0 and 70 per cent, although you have significant freedoms to vary your income withdrawals within these ranges.

These lower income limits on ASPs are designed to prevent investors from depleting their pension funds before they die. In the case of the ASP, the benchmark income amount is based on the income from a level annuity (where the income does not rise annually) for a 75-year-old.

This sounds sensible. Why is the government concerned about possible misuse?

The Treasury has concerns that investors will opt for the ASP mainly because it allows them to pass on assets when they die.

Under the ASP rules, spouses, civil partners and financial dependants can receive assets held within an ASP free of inheritance tax. Individuals can bequeath their ASP assets to others but these assets will then form part of their estate for inheritance tax purposes.

If the spouse, civil partner or financial dependant inheriting ASP assets is over 75, he or she will have to manage the fund along ASP rules. Under the age of 75, the more flexible unsecured pension rules apply.

You can also opt for a charity to receive your ASP assets, in which case no inheritance tax would be charged.

Are there any risks?

Certainly. And how great these are will depend largely on how your fund is invested.

Invest too cautiously, say, putting most of your fund in cash and, if you are draw near the maximum annual limits, there is a risk that your fund will be gradually depleted.

Invest in riskier assets – such as shares – where the potential for strong returns are higher and there is a risk that in a stock market downturn, your pension fund (and therefore also your future income) could be seriously damaged.

Similarly, if you end up living a long time, you may have been much better off with an annuity. This is because annuities redistribute a portion of your capital each year in order to beef up the income level.

If you are uncomfortable with these risks or you want to ensure that your income doesn’t fall in retirement, you may be better off with the security of an annuity.

What about charges? Are ASPs expensive?

You will need to factor in the effect of charges which will vary from plan to plan. Typically this will include an annual management charge – often levied as a percentage of total assets under management – as well as commissions for trading shares. In addition, as ASPs must be reviewed annually, most pension companies charge an additional £75 to £200 a year to manage these plans.