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The numbers game

07 September 2006 / Richard Curtis
Issue: 4074 / Categories: Comment & Analysis , Investments
RICHARD CURTIS and RUFUS discuss the tax and theological implications of their retirement plans.

RUFUS AND I were swapping dog jokes the other day. On the basis that it's the old ones that are the best, I told him my favourite. 'My dog's got no nose. How does he smell? ... Terrible'. Rufus was not particularly impressed; he prefers something more cerberus, sorry, I mean cerebral. I am not sure if his joke is offensive (what one's aren't?), but it concerns an insomniac agnostic whose word recognition is, shall we say, limited. 'He lies awake all night wondering if there's a dog!' (Rufus says, send him an e-mail, he'll fill you in on the rest.)

In fact, Rufus thinks he has a career as a stand-up comic, although as he doesn't come from Birmingham, Liverpool, or Newcastle, this apparently means that his chances of success are somewhat reduced — apparently it's all to do with the accent. On the subject of Cerberus and following the religious theme of his opening joke, he tells me that he is working on a new routine. Apparently rabbits and corned beef aren't his only interests and he thinks that there is massive comic potential in the current furore over ASPs or alternatively secured pensions.

The tin test

Following his 'corned beef tin test' (i.e. if it sounds like a tin being opened it must be good so you start running in that direction), Rufus is certain that whoever dreamed up the idea of ASPs cannot be a dog-owner. Let's look at this logically. People should be encouraged to save for a pension (people like this; they get tax relief). Historically, pensions had to be used to purchase an annuity to provide the pension income in retirement; people didn't like this so much; falling interest rates and increasing longevity meant that annuity rates have fallen by more than half since 1990. Hardly surprising therefore that anyone hearing news of an alternative to taking an annuity — where you can take an income and the pension fund effectively stays in a pot with your name on it and can thus be bequeathed to your heirs rather than falling into the hands of the annuity company (to Rufus, this is the equivalent of the corned beef tin being opened) — might be tempted into making a bee line for that option.

The benefits of religion

How did this all come about? Well, as if religion hasn't got its hands full creating mayhem in the Middle East, the Balkans, the Indian sub-continent and the Far East and deciding whether we arrived here as sentient taxpaying beings fully-formed or via the primordial soup, it also likes to keep its hand in by dabbling in financial matters. Perhaps taking the karmic idea of 'what goes around, comes around' one stage further, the Christian Brethren have rejected free will and have come down heavily on the side of predestination, deciding that the date of one's demise is preordained by God. Fair enough, one might surmise; after all, we may have all pondered at some time that 'when your number's up, your number's up'. Unfortunately, the numerical aspect does not only figure here in relation to your own particular personal number (a sort of cosmic 'come in number six, your time's up'), but by reference to statistics as well.

The Brethren and others have determined that taking an annuity is betting on the date of your own death and others (although the insurance industry seem to prefer the phrase 'mortality cross-subsidy'), a matter for God.

 While I don't recall a specific ban on betting, we can probably assume that it does not get much in the way of a divine endorsement. I suppose it comes under 'coveting thy neighbour's goods', which as we are supposedly talking about tax could perhaps best be described as the 'Schedule D, Case VI' of the Ten Commandments. Following the relaxation of the Sunday trading laws (number four) and the news that children need no longer be taught the difference between 'right and wrong' (numbers five through nine I suppose), perhaps it's not surprising that the Government seem to be actively promoting betting. (I hear that conversion of part of the Millennium Dome into a casino has already started even though the location for a licence will not be announced until December!)

A righteous 'thumbs down'

So, annuities having received the 'thumbs down', how does the righteous taxpayer — and especially the self-employed righteous taxpayer — provide for himself in his old age (assuming of course that he is predestined to reach it)?

Having accommodated followers of Islam with 'alternative finance arrangements', the Government no doubt thought that it was only fair that they should accommodate the Christian Brethren with 'alternatively secured pensions'. This means that, instead of having to use the assets in the pension fund to purchase an annuity at the age of 75, the pensioner can continue to take an income drawdown.

The option to take income withdrawal as it is more correctly known has effectively been around since 1995, but had to be followed by the purchase of annuity for those who survived until 75. But in 2003, paragraph 3.5 of the Government's consultation document Simplifying the taxation of pensions: the government's proposals stated that 'conventional pensions and annuities are likely to remain the most popular and suitable means of securing benefits. However, some religious groups have principled objections to the pooling of mortality risk and need to be accommodated by the new rules. The Government, therefore, proposes to allow pension income to be delivered after age 75 through alternatively secured income (ASI)'. The framework for this was set out in FA 2004, Sch 28.

The problem here is that although the intention was designed to accommodate the sensibilities of the Christian Brethren, no mention was made of this in the legislation. This resulted in some rather odd exchanges in the 2006 Parliamentary debates on FA 2006, with Mark Hoban pointing out that 'the Government have, therefore, through the 2004 Act, removed an argument for compulsory annuitisation', while Ed Balls continued the line started by Ruth Kelly in the 2004 debates that 'it was always our intention that the rules would apply in the specific and narrow case of individuals with such principled religious objections such as the Christian Brethren'.

Is it for you or your client?

Part of the problem is that the obligation to use the pension fund to purchase an annuity by age 75 has been seen as 'a bad thing' for so long that the new alternative, the 'alternatively secured pension', may automatically be seen as 'a good thing'. But as Penny Bates explained in 'Don't get bitten by an ASP' (Taxation, 26 January 2006, page 416), the necessity of annual reviews to ensure that the fund is not becoming exhausted too quickly will add to costs and the effect of the fall in equity markets made the previously falling annuity rates seem mightily attractive.

The news item, 'Inheriting the ASP' (Taxation, 1 June 2006, page 236) explained the potential inheritance tax liabilities arising on the happening of various events, but these do not perhaps negate the effect that — even after tax — something will be left to the pensioner's estate.

Enter righteous indignation

Now let me think: where have we seen this scenario before? Government comes up with a plan that they believe will promote some activity they deem worthy, they want to play cricket with the big boys. Tax professionals warn that this could have adverse consequences and lead to tears before bedtime. Government shrugs off warnings and presses ahead. Advisers — who would at the very least be neglecting their duties, if not leaving themselves open to criticism or worse if they were not doing their best for their clients — advise pensioners that they could take advantage of the new rules; the equivalent of bodyline bowling. Government throws a tantrum, saying that it never intended that the ball should be thrown that hard and stalks off home taking the bat and ball with them while muttering that they are going to change the rules, trying hard not to cry and hiding a large bruise.

The problem for the Government seems to be that, despite the protestations of Ed Balls that 'this is not a mainstream product and it must not become a tax avoidance measure. We shall not be going down that road', they do seem to have driven themselves into a tax and theological cul de sac and it is a little difficult to see how they can now back up to the last turning.

The 'nuclear option' is to knock the whole thing on the head, but this risks claims of religious discrimination by the Brethren, orthodox Muslims, etc. whose beliefs preclude gambling ('mortality cross subsidy' not being a phrase, I suspect, that figures prominently in the Bible or Koran). Alternatively, if they decide to try to limit ASPs to such groups it would appear that those belonging to other religious (or indeed non-religious) groups will be able to claim that it is they who are being discriminated against.

It would also be interesting to hear the thoughts of the Treasury on how they will manage to reverse out of their cul de sac without running into the Employment Equality (Religion or Belief)(Amendment) Regulations SI 2003 No 2828. This brings trustees and managers of occupational pension schemes within the prohibition of religious discrimination in the benefits of employment, which includes occupational pensions. Personal pensions are not included, but it will be interesting to see how one type of pension could be discriminatory, whilst another could not.

Are these arguments the tax equivalent of arguing about how many angels can dance on the head of a pin? The Government's best option may simply be to back away quietly, muttering something about the lessons to be learned when the state becomes involved with religion. The genie is out of the bottle and the problem would probably recur on a larger scale with the National Pension Saving Scheme proposals, which will make pension savings compulsory unless one opts out. Without an income withdrawal facility, how will this accommodate divergent religious beliefs?

Rufus thinks that this is great of course. His view is that at least when he hears the can being opened he knows there's a pretty good chance of there being a reward on his arrival. Whilst he sees little personal or social benefit arising from the Government's apparent current obsession with encouraging us to lay a bet at every opportunity, he remains somewhat less convinced that abstention is going to bring some cosmic reward denied to others, especially others whose 'gamble' is with a view to providing an income in the twilight years of themselves and their spouse or partner. To him, this does not sound like a particularly forgiving dog, or did he say God?

A professional view

Tom McPhail of Hargreaves Lansdown thinks that the Government are being sidetracked by their view that because the majority of the people who will benefit from the income drawdown facility from 75 will be wealthy, they will be avoiding tax by making use of this option. The reality, Tom thinks, will be different. First, there will be a relatively small minority of people who are (a) not in an employer's pension scheme, (b) have reached 75, and (c) have the 'risk profile' to enable them to take income drawdown rather than an annuity. Secondly, calculations prepared by Hargreaves Lansdown (see the Internet version of this article at, show that the total tax take from an ASP is likely to be higher than from a compulsory purchase annuity. For example, their figures indicate that the tax take (discounted to today) for a 75 year old male taking an annuity from a fund of £100,000 who survives for ten years, with his wife taking 66% of the income for a further ten years until her death would be £35,693, compared to £42,250 for a husband and wife with an ASP.

Tom's view of alternatively secured pensions is 'let them run. ASPs will only be suitable for a very small percentage of the population and consequently the Government should not be concerned that there will be abuse'.

The Government does seem to be concerned that there is some potential inheritance tax avoidance to be had here. While those with capital remaining in the fund on death would no doubt be happy if that were able to be passed on without inheritance tax, this does not seem to be a driving factor. From my conversations, investors are mainly happy that they are able to pass on 60% of something, rather than 100% of nothing.

In the meantime, in response to an enquiry on the current state of play, a Treasury spokesman said: that 'the Government is considering all options for ensuring that ASP funds are used only for their intended purposes of providing pension income for those who have a principled objection to the pooling of insurance and mortality risks. This is not restricted only to matters in connection with inheritance tax charges on leftover funds. The Government will announce any further necessary action in due course'.

A dog in his dotage

Taking advantage of Rufus's new found interest in pensions, I took the opportunity of asking him about his own plans for retirement. He tells me that he might spend a little more time monitoring his investments and looking into alternative portfolio opportunities. Other than that, he says that he is planning on spending most of his leisure time lazing around dreaming of chasing rabbits, running around chasing rabbits, and eating his favourite — rabbit-flavoured — food; pretty much how he spends most of his time at the moment in fact!

Issue: 4074 / Categories: Comment & Analysis , Investments
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