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   Simplification & income
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  Value protected annuity   AVCs
  Term certain annuities   Income drawdown
  Annuity guaranteed period   Death benefits
  Alternatively secured pensions  

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Value protection annuity
An additional feature of pension annuities is the value protected annuity. This represents a return of original capital less annuity payments received in the event of the annuitant's death before the age of 75. The proceeds are payable to a spouse and in a pension enviroment can be used to purchase a lifetime annuity, fixed term plan or pension drawdown. If the fund is taken as a cash sum a 55% tax charge is payable.

If the annuitant selects the value protection annuity it will not be possible to add a guaranteed period. As the value protection annuity is only available up to the age of 75, the longer the annuity purchase is deferred the shorter the period of protection and this must be balanced with the benefits of a 10 year guaranteed period.


Term certain annuities
Where an individual is taking income drawdown it will be possible to purchase a term certain annuity for up to 5 years. The income from the term certain annuity counts towards the maximum income withdrawal allowable under income drawdown up to the age of 75. All term certain annuities must end by age 75.


Annuity guaranteed period
Currently the guaranteed period is for a maximum of 10 years and starts the same date the annuity starts in payment. Hence, in the event of an early death of the annuitant after 6 years, a 10 year guaranteed period will continue to pay the annuity for a further 4 years. Depending on the life company it is possible for this remaining income to be commuted to a lump sum instead. Under pension simplification it would not be possible to commute to a lump sum, although the 10 year guaranteed period would remain.


Alternatively secured pensions
These arrangements are no longer available as there is no longer a requirement to purchase a lifetime annuity at age 75.

The following describes how these plans use to work.

At the age of 75 an alternatively secured pension (ASP) would allow an individual withdrawal of income, similar to an unsecured pension fund such as income drawdown. An individual must transfer from their existing arrangement such as stakeholder personal pension or income drawdown to an ASP plan at that time.

Alternatively secured pensions have been introduced in particular to assist those individuals with a principled religious objection to pooling mortality risk and this prevents them from purchasing a pension annuity on ethical grounds.

ASPs have been available since 6 April 2006 offering a minimum income withdrawal of 0% to a maximum of 70% based on the Government Actuaries Department (GAD) annuity tables for an annuitant aged 75, and reviewed annually. Although this low limit to continue drawing an income has been set to discourage people that have no religious reasons for not purchasing annuities,
the Government was aware ASPs were being used by those intending to avoid being forced to purchase an annuity at age 75.

As a result, from 6 April 2007 new rules introduced apply a minimum income requirement of 65% and a maximum of 90% of GAD tables. Any payments that fail to comply with these limits will incur a 40% tax charge on the difference between the minimum income limit and the amount of income withdrawal paid during that year.

Where funds remain on the death of the member, in contrast to income drawdown, an ASP must first provide for any financial dependants. Thereafter any surplus can be passed to a charity with no tax liability. If no charity is nominated, the benefits can be used to enhance the benefits of other members of the scheme of which one may be a family member.

From 6 April 2007 this surplus from the ASP fund is treated as an unauthorised payment (these were within the authorised rules prior to this date) and subject to a tax charge of up to 70%. On the death of the member the only authorised payments will be a dependant's pension benefits and to a charity. This high tax rate is an attempt by the Government to deter the use of alternatively secured pensions to transfer retirement benefits to family members, rather than it's intended purpose as an option for those that object to purchasing an annuity due to religious beliefs.

An ASP also becomes the top part of the member's estate for Inheritance Tax (IHT) purposes although funds nominated to a charity are excluded from IHT. Pension benefits to a spouse, civil partner or individuals that were financially dependant at the time of death are tax deferred until such time that the entitlement ends at which point any liability would be due. If there are no beneficiaries or charity nominated on the death of the ASP member, the life insurance or pension administrator can make a nomination, most likely to a charity of their choice.


AVCs
Since A-Day, the Pension Simplification rules introduced from 6 April 2006 allow a tax free lump sum of 25% to be taken from an AVC or FSAVC. The balance of the pension fund must still be used to buy pension annuities at retirement. The individual has the option to search for the highest annuity rates using an open market option, however, before making a decision at retirement, learn more about annuities, compare annuity rates and secure a personalised annuity quote offering guaranteed rates.

Previous to A-Day, there was no possibility for commutation to a tax free lump sum with an AVC started after 1987 and free standing additional voluntary contributions (FSAVCs). The whole of the fund value had to be used to purchase a compulsory purchase annuity providing a pension income at retirement age.


Income drawdown
Unsecured income before retirement or income drawdown is to remain but there are changes that make this pension arrangement more flexible. Previous to A-Day the withdrawal amounts were limited by tables produced by the Government Actuaries Department (GAD) where the maximum income was 100% of a single life annuity and the minimum was 35% of the maximum.

Pension simplification from 6 April 2006 replaces the GAD tables allowing a minimum income withdrawal of £0 and a maximum of 120% of a single life annuity. This income amount is to be reviewed every 5 years. Included in this amount would be any income derived from a term certain annuity.

Where death occurs prior to the individuals 75 birthday the remaining fund would be paid to the beneficiaries less a 55% tax charge. After the age of 75 it is now not necessary for the individual to purchase a lifetime annuities.


Death benefits
The maximum death benefit available before retirement benefits are drawn is equal to the lifetime allowance, this being £1.5 million in 2006 rising to £1.8 million in 2010 reducing to £1.5 million in 2013 and is £1.25 million from 6 April 2014.

Previously for occupational pension schemes there were complex salary related formulae for determining the death benefits. If the total amount of life assurance exceeds the lifetime allowance the following options apply:

Any amount that exceeds the lifetime allowance as a lump sum is subject to a 55% lifetime allowance charge payable by the beneficiaries of the life assurance;
   
If the excess lump sum is used to provide dependants benefits such as an annuity, the excess will not be subject to the lifetime allowance charge.

If death occurred after vesting there would be the protection afforded by a value protection annuity or term certain annuities or the guaranteed period of up to 10 years from a standard annuity. For income drawdown before the age of 75 a return of the capital sum less 35% tax and for an alternatively secured income after 75 the proceeds must be used to provide pensions for dependants.

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  55 £4,206  
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  60 £4,438  
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  70 £5,409  
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