Pensions Advice, Retirement Planning - Investment Financial Adviser Dunfermline, Fife, Scotland UK

Posted by William on September 21st, 2007 in Pension Advice

April 6, 2006 was known as A-Day whereby the Government introduced a long overdue overhaul of pensions legislation in order to simplify our current system. A-Day affected anyone with a personal or company pension (more on A-Day in a different article).

This legislation created what are known as Unsecured Pensions and Alternatively Unsecured Pensions. Today we are going to take a closer look at the benefits and drawbacks of what these new forms of pensions are. They are often also known as “income withdrawal”.

An Unsecured Pension (USP) may be chosen instead of an annuity to fund one’s retirement. The reason they are named unsecured is because while you withdraw an income from your pension the rest of the fund continues to be actively invested. It is therefore subject to market conditions which can positively or negatively affect your fund.

You may find that if your fund performs well it increases in value and your income rises - on the other hand it may perform badly and your income could go down. In effect you are still exposing yourself to risk even in retirement. There are however some benefits which are attractive to those who don’t mind a limited exposure to this increased risk while they are retired. The reason I say limited exposure is because the government will only allow you to have an unsecured pension up until the age of 75 years.

Someone under the age of 75 taking out an Unsecured Pension has two choices as to how they may take their income.

They can either choose income withdrawal - also known as pension drawdown or pick a ’short-term annuity’ instead. At age 75 therefore, the unsecured pension will stop and you must either buy a lifetime annuity or an Alternatively Secured Pension. By doing so the risk element present in an unsecured pension is removed and replaced by the guarantee provision of an income but only if you purchase an annuity. However by choosing an Alternatively Secured Pension you will still risk exposure to market conditions because Alternatively Secured Pensions continue being actively invested.

The two main benefits of an Unsecured Pension mean firstly that you can continue to enjoy the tax breaks that the Government gives to those saving for retirement in a pension. Secondly you may enjoy greater returns from your pension fund investments if the market is favourable to you.

Adding together the compounding effect of these two benefits could provide substantial extra income or increase your pension fund to purchase a better annuity with at the age of 75. Once again though you need to be the sort of person comfortable with exposure to risk doing these years of your retirement. Many people are not, but if you are it may just be your cup of tea.

Alternatively Secured Pensions (ASPs) work in a similar way to unsecured pensions. For those not wishing to buy an annuity with their pension fund when reaching the age of 75, ASPs are available instead. Originally ASPs had no minimum income withdrawal requirement but this feature has now been changed and a minimum income level has been introduced.

Another feature of ASPs attractive to some was the ability of ASP holders upon their death to pass any remaining funds over to the pension funds of other ASP holders if they had no dependents. The Government has since acted to prevent this loophole being used as a device to pass on tax privileged pension funds - their intention is that ASPs are primarily designed to secure a retirement income for those that purchase them and their dependents only. Additionally any lump sum death benefits risk being taxed at up to 70% when passed on to other scheme members as well as be liable for Inheritance Tax.

ASPs are a complex investment vehicle and should be carefully considered with an appropriately qualified Independent Financial Adviser. Charging structures within them can also be quite high and may adversely affect the income goals you may be trying to achieve using one.

So are USPs & ASPs “good, bad or ugly?” Well, for most people even though annuity rates have been dropping in recent years the increased security of a guaranteed income that annuities provide generally far outweighs the somewhat riskier benefits that both USPs and ASPs offer.

So for those who are cautious and risk averse I’d probably steer towards securing a good annuity as your preferred retirement income vehicle. It’s important to seek specialist financial advice when planning in this complex area.