Securing the right income
By Danny Cox | 23 Jul, 2008
There was an interesting story in the papers recently regarding family SIPPs. For those with a keen memory, the original pension simplification proposals opened the way for family SIPPs so that your pension money could pass down generations, thereby supporting your children’s future.
Unfortunately a large size 12 tax boot came down on this idea in the form of an 82% tax charge if you tried to do so. Family SIPPs, in this sense, do not exist.
The story recently, related to how you take income from your pension at age 75 and pass some of that income on as a gift. At 75 your pension plan gives you three options:
Buy an annuity (not everyone’s cup of tea) OR
Continue to draw an income under the Alternatively Secured Pension (ASP) route – this is income drawdown for the over 75’s so only a consideration for those to allow their pension fund to remain subject to fluctuations as a result of market forces OR
Take a scheme pension. A scheme pension is like an ASP in the sense that you take an income from the fund and it remains invested. You and your pension fund take the investment risk.
You can take a higher level of income from a scheme pension than you can from either an annuity or ASP. If you are taking a higher level of income and giving it to your children (because it is surplus to your needs), or even paying this into a pension for your children, you are passing on some of the wealth in your pension and in a sense creating a “family SIPP” scenario. But the pension income is taxable. And after your death and your Spouse’s death, there will be 82% tax paid on the remaining fund leaving 18% to pass on.
Income tax is also not the only consideration; there is also the possibility of inheritance tax being payable on any gift but there is an assumption here that because the income is surplus, the gifts fall within the gifts from normal income exemption, and is therefore IHT free. This will however be based on an investors personal circumstances and the levels of bases of tax are of course subject to change.
This seems to work quite well if you are happy to pay the fees to run a SIPP (or other pension) with a scheme pension and all the complexity that this involves. A simpler solution would use an investment linked annuity which would be easier and cheaper to run, but would not allow you to pass on 18% on the event of the second death.
In my view, the vast majority of people will still buy an annuity by age 75, unless the rules change - again. A scheme pension is a good idea in principal but really only practical for a small number of people and in my view securing the right income for your lifetime is more important.
