L eading pension providers are offering clients who keep their money in alternatively secured pensions (ASPs) the chance to reduce their inheritance tax bill when they pass unvested funds to heirs.
Since March, when former chancellor Gordon Brown approved steep death taxes on pensions for the over-75s, pension providers have been hunting for ways to entice clients to keep money in ASPs – schemes that investors enter into at the age of 75 if they choose not to buy an annuity.
As it stands, any ASP funds remaining on death can suffer tax charges of up to 70 per cent on top of any inheritance tax liability of 40 per cent. Family members can therefore receive as little as 18 per cent of the remaining pension pot.
Only spouses, civil partners and financial dependants can inherit pension assets free of tax, although ASP assets can also be bequeathed tax-free to charities.
But pension providers are unearthing ways to reduce the high tax charges. Rowanmoor Pensions claims it has found a way to cut the 82 per cent charge to 64 per cent. Hornbuckle Mitchell, another self-invested personal pension (Sipp) provider, has a similar programme.
The tax charge on unvested funds can be reduced for those who have ASP funds in group Sipps and small self-administered schemes (SSAS), which are available for those in company pension schemes. Funds must be in an ASP when the scheme member dies for heirs to be eligible for the lower tax charge. No deals can be structured post mortem, says David Seaton, director of Rowanmoor.
To reduce the tax charge, Rowanmoor pools pension money between members of group schemes – say, family members or co-workers – and parcels it in such a way to avoid certain additional tax charges.
If an individual member’s personal funds are less than 25 per cent of the entire group fund then some “unauthorised payment charges” are waived.
So if you were to have, say, £100,000 in an ASP, on your death the money would be subject to an initial 40 per cent inheritance tax charge. The remaining £60,000 would be classified as a “transfer of alternatively secured rights” and – as long as it represented less than 25 per cent of the total assets in the group fund – would be taxed at a further 40 per cent. This translates into a total tax liability of 64 per cent for the pensioner’s heirs.
Those with ASP funds in individual Sipps – where assets would represent the entire fund – face a further 30 per cent charge on top of this, which would increase their total tax bill to 82 per cent, say analysts.
Rowanmoor’s SSAS group scheme and family pension trust can hold personal pension money and offer the same array of investments including unquoted assets as other Sipp providers.
“The argument we’re making is if you keep your pension benefits to less than 25 per cent of the fund, you won’t be subject to additional surcharges,” says Seaton.
Some analysts say it is complicated to ensure one portion of say, a family trust, represents less than a quarter of total assets.
“Technically these arrangements are permissible, but it’s harder to see them from a practical standpoint,” says Andy Bell, director of AJ Bell, the pensions provider.
