BBC Home
Explore the BBC
BBC News
Launch consoleBBC NEWS CHANNEL
Last Updated: Tuesday, 10 October 2006, 20:58 GMT 21:58 UK
The curious affair of the ASP
Money Talk
Tom McPhail
Hargreaves Lansdown

Earlier this year, as part of its pension simplification plans, the government introduced new investment freedoms for pension funds.

Tom McPhail
Tom McPhail of Hargreaves Lansdown

Now, only a few months later, it is threatening to clamp down on one of these new freedoms, and possibly to remove it.

The reason for this is that the government claims the new rules are only intended to be used by a Christian sect.

The government believes that the new rules are being used instead by wealthy people, and that this is an abuse of the system.

The specific rules which are causing the problem, are those which mean that you no longer have to buy an annuity with your pension fund at retirement.

Instead of handing over your savings to an insurance company in exchange for a guaranteed income for life - an annuity - you now have a choice.

Control of your savings

This choice is called the Alternative Secured Pension (ASP).

ASPs involve investment risks, and they are also only available from age 75.

But unlike with an annuity, if you invest your money in an ASP, then you can keep control of your savings.

When you die your pension fund is used to provide an income for your spouse.

If you have no spouse then the fund can be passed on to your children, less inheritance tax, or given to charity.

Most people will continue to need the certainty of a guaranteed income for life, and only an annuity delivers this.

For these reasons, most people will continue to buy an annuity with their pension fund at retirement.

Because of the advantages of the ASP, though, some investors will want to use it.

Comfort for some

Probably only a few hundred people have so far used the ASP option.

It was always our intention that the rules would apply in the specific and narrow case of individuals with... principled religious objections
Ed Balls, Hansard 04 July 2006, Column 728 / 729

And they may not appeal to more than a few thousand people each year.

Many others who won't use the ASP, are nevertheless comforted to know that the government has given them a choice over the use of their pension fund.

The government only introduced the ASP after persistent lobbying by the Plymouth Brethren, who argued that annuities were contrary to their religious beliefs.

The government claims that the ASP was introduced only for the benefit of the Brethren.

It also claims that for non-believers to use the ASP represents an abuse of the tax breaks on offer from a pension.

However the government couldn't actually enshrine this view in legislation, because that would be religious discrimination and therefore illegal.

More tax from ASPs

Ed Balls says that he is concerned about undue tax advantages for the wealthy.

Yet the analysis done by Hargreaves Lansdown shows that in the majority of cases the government gets around a third more money from ASPs than it does from an annuity.

In our experience investors are happy to pay the tax on ASPs - unlike most other taxes - because they would rather see some money pass to their children than none at all (which is what would happen if they had bought an annuity).

So we have a ridiculous situation where a government minister is actively campaigning to restrict the use of rules which his own government introduced less than twelve months ago.

He is also arguing that it is only OK to use these rules if you hold a very particular and narrow set of religious beliefs, but not if you are wealthy.

This is in spite of the fact that these rules produce extra tax revenue for the government and, most remarkably of all, these are taxes which investors are actually happy to pay.

I expect an announcement on the ASP option in the November pre-budget report.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

Has China's housing bubble burst?
How the world's oldest clove tree defied an empire
Why Royal Ballet principal Sergei Polunin quit


Americas Africa Europe Middle East South Asia Asia Pacific