Cicero Policy Briefer

Issue 4, September 2006

ASPs: a snake in the grass?

By Mark Twigg

Not for the first time the Government finds itself caught in a bind in its attempts to make sense of A-Day, its pensions simplification reforms introduced in April this year. After a long, high-profile wrangle with industry over what level to set the new annual and lifetime contributions limit at, followed by the Treasury's eleventh hour decision to scrap plans to allow residential properties to be invested in SIPPs without much in the way of consultation, the reforms have not gone as smoothly as the Government had hoped.

The latest falling out has come in the shape of the alternatively secured pension or ASPs. To those of us who followed the legislation on its passage through Parliament it was always clear that Government thinking on this issue was somewhat muddled. Successive Treasury ministers had spent years fighting off industry campaigners, notably the Retirement Income Reform Campaign, looking to scrap the need to buy an annuity at age 75; one of those elements of compulsion already enshrined in the UK pensions system and not particularly popular with pensioners. However, the arguments in favour of the status quo put forward by ministers were always far from convincing.

Primarily, the Treasury argued that removing the compulsory annuity rule would only benefit the rich because most of the proposals put forward would still require the individual to annuitise enough of the pension fund to prevent them falling back on means tested state benefits, which would preclude those on lower incomes with smaller pension pots. In a debate that often harked back to 1970s class war, certain voices on the Government backbenches argued that any form of annuity reform would be a gift to the middle classes, who would exercise their newfound freedoms by blowing their pension pot on world cruises and, worse still, passing it on to their children. That A-Day also introduced more generous limits on trivial commutation provided exactly the same opt-out to the majority of people on low incomes who can avoid the compulsory annuity rule as long as their fund is smaller than £15,000.

Nonetheless, class politics aside, and armed with such a counter-intuitive understanding of how older people behave in retirement, most of whom are actually very cautious in their financial planning, the message from Treasury was clear: the 75 rule is here to stay.

Then came the Plymouth Brethren, who have never been too enamoured with the prospect of pooling longevity risk. To the Brethren, the idea that an actuary should make a judgement on how long an individual will live is an affront to their religious principles. Such judgements are for God alone to make. And so the Treasury caved into pressure in allowing the new ASPs: they avoid the need to buy an annuity, though only on religious grounds, even though legal advice would have made it clear at the outset that such an approach would be unenforceable; European Union human rights law prevents such discrimination on grounds of religious belief.

So what of all those middle income pensioners looking to avoid an annuity? The FSA has already signaled that any advisor who recommends an ASP to their clients, even where the religious principles don't apply, is currently free to do so. If the Treasury sticks to its guns it will certainly face a legal challenge, a process which could prove drawn out and costly.

Alternatively, it would be forced to scrap ASPs altogether, which may itself fall foul of EU anti-age discrimination rules. Which all creates a rather confusing picture and does little to help those people currently looking to plan for their retirement. For these people at least, pensions simplification is proving to be anything other than simple.

Mark Twigg can be contacted on +44 (0)20 7665 9537 or click here to email.

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