Wealthy pensioners are being presented with new opportunities to keep control over their retirement funds once they reach the age of 75.
New schemes that allow families to invest their pensions together and pass assets to other family members offer an alternative to buying an annuity.
The products allow the option of what is called a “scheme pension”. They contrast with traditional personal pensions that do not allow pension assets to be passed to family members after an annuity has been bought.
The products also rival the route of the alternatively secured pension (ASP), which is another option for pensioners after the age of 75.
Government rules currently state that before a pensioner turns 75, they are allowed to keep their pension invested in the stock market and draw an income from it, in what is known as income drawdown.
But once pensioners turn 75, they are normally required to buy an annuity, which means they hand over their pension assets to a life insurer and, when they die, the pension assets cannot be passed on to heirs.
One alternative to buying an annuity post-75 is to move into an ASP, which also allows the pension to stay invested in the stock market. But if the investor in an ASP dies after age 75, tax charges of up to 82 per cent are applied to the remainder before it can be passed to heirs.
Scheme pensions offer a more tax-efficient way of redistributing pension assets to family members.
They work in a similar way to final salary, or defined benefit, schemes. But those are usually for very large groups of people in a company scheme.
The amount of income to be paid to a member is calculated by the scheme’s actuary, and if a member dies, the remainder of their pension is pooled and shared among other members.
Smaller scheme pensions, which have been possible since 2006, operate in the same way except the members of these are either in the same family or business partners.
Rowanmoor Pensions has had a scheme pension called the Family Pension Trust for three years. Hornbuckle & Mitchell also has a similar product.
But it is only with the launch in May of a scheme pension from Axa Winterthur, a better-known brand, that financial advisers and wealth managers have been taking the concept more seriously.
Wealth planners at Killik & Co and Bestinvest are interested in the new scheme pension products and are considering recommending them to clients.
“A scheme pension offers a real alternative to an ASP,” says Mike Morrison of Axa Winterthur.
One key benefit of scheme pension compared with ASP is that it can pay a higher income in retirement. In ASP, the maximum income is set according to government actuary tables, which can be altered to between 55 and 90 per cent of the rate. This is a lower income than under income drawdown, which can go up to 120 per cent of the rate.
Under scheme pension, there are no set income limits. An actuary calculates the income to be paid out by the scheme and can match this more specifically to the beneficiary’s age and health, so this could be a higher amount than under ASP.
Another benefit of scheme pension is that the products have an option of guaranteeing the income payouts for 10 years. So if a member dies, the income will continue to be paid out to beneficiaries, who will only be subject to income tax at their normal rate and not inheritance tax.
Any remaining funds can be transferred to other family members in the scheme – though this means they will not be able to access them until they reach pensionable age.
If they want the funds immediately, they might have to pay tax of up to 73 per cent – though this is still cheaper than the tax of up to 82 per cent on ASP benefits.
Growth within the fund does not have to be redistributed to family members equally, meaning that older members can effectively pass some of their assets to younger members, though the actuary must have a good reason to do this.
And if the pension performs better than expected, the amount needed to pay members in retirement can be adjusted downwards and the surplus, again, transferred to younger members.
Scheme pension products share features of a self-invested personal pension (Sipp) and a small self-administered scheme (Ssas). The schemes can be set up for between two and 12 people.
One drawback is that the schemes are expensive to set up so are only suitable for wealthier pensioners. Axa estimates that the value of the scheme should be at least £200,000 for it to be cost-efficient. Initial charges can be more than £1,000 and annual charges are hundreds of pounds.
Matt Brunwin at Bestinvest warns that ASP is likely to be more suitable for people who have a spouse much younger than they are.
If they die in ASP, their pension can be passed to the younger spouse who can use it under income drawdown rules, which allows a higher income plus greater investment freedom.
ASP also allows the whole fund to be paid to a charity on death, which is not allowed under scheme pension.
Some also fear that the government could clamp down on such schemes, as they could be used purely to avoid inheritance tax.
But Morrison at Axa Winterthur believes the schemes are within the rules of HM Revenue and Customs.
