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  • FIRST POST
    • PeacefulWaters
    • By PeacefulWaters 21st Sep 16, 2:31 AM
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    PeacefulWaters
    Defined benefit scheme and reduced life expectancy
    • #1
    • 21st Sep 16, 2:31 AM
    Defined benefit scheme and reduced life expectancy 21st Sep 16 at 2:31 AM
    Hi, while I think I know the options I'd rather explain my circumstances and let others spell things out for me, just to ensure I've not missed anything.

    The bulk of my pension provision is a defined benefit scheme. I'm 48. I have been in the scheme since I was 20 and still contribute. It's based on 1/60ths accrual. Pension age is 60. I can draw the pension at 50 with a 3% actuarial reduction for each year it's taken early.

    The pensionable salary is £37,500. This no longer increases in value while I remain an active member.

    Valuation for divorce purposes is £475,000. I am now divorced and have a son aged 18 in full time education. If I die he would receive a pension until he's 23.

    I am currently being tested for myeloma. Assuming I am diagnosed with this illness, where life expectancy even if treated averages five years (although there are a small percentage of survivors at 15 years), it would seem to make sense to review my options with regards to my defined benefit pension. It seems like a large value to die with me. As health during the treatment phase is generally good, it's unlikely I would get enhanced early retirement.

    I believe I could survive financially from savings to age 55, should I stop working in the next few months without drawing the pension.

    As I see it my options are:

    1) leave things as they are and have the pension die with me.

    2) move funds to a SIPP (using an IFA) and lose the possibility of retirement income as an option between age 50-54. But the lump sum then becomes part of my estate.

    What are your thoughts? What other options am I overlooking?
Page 1
    • Malthusian
    • By Malthusian 21st Sep 16, 9:42 AM
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    Malthusian
    • #2
    • 21st Sep 16, 9:42 AM
    • #2
    • 21st Sep 16, 9:42 AM
    Hope your test goes positively.

    I can draw the pension at 50 with a 3% actuarial reduction for each year it's taken early.
    Do you have a protected scheme retirement age? Otherwise it will be 55.

    2) move funds to a SIPP (using an IFA) and lose the possibility of retirement income as an option between age 50-54. But the lump sum then becomes part of my estate.
    No. On death before age 75 the SIPP would be able to pay the full value of the pension plan as a tax free lump sum to a nominated beneficiary, presumably your son.

    If you are unlikely to survive to retirement age and the current death benefits are a relatively short survivor's pension, then this is one of the few cases when transferring the CETV to a SIPP can be a relatively open-and-shut case. However you should certainly consult an IFA.
    • PeacefulWaters
    • By PeacefulWaters 21st Sep 16, 9:51 AM
    • 4,680 Posts
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    PeacefulWaters
    • #3
    • 21st Sep 16, 9:51 AM
    • #3
    • 21st Sep 16, 9:51 AM
    Hope your test goes positively.
    Originally posted by Malthusian
    So do I! But I've certainly been prepared for bad news.

    Do you have a protected scheme retirement age? Otherwise it will be 55.
    Yes.

    No. On death before age 75 the SIPP would be able to pay the full value of the pension plan as a tax free lump sum to a nominated beneficiary, presumably your son.
    Ok, so it could save inheritance tax but restricts me from dishing the money out to others.

    If you are unlikely to survive to retirement age and the current death benefits are a relatively short survivor's pension, then this is one of the few cases when transferring the CETV to a SIPP can be a relatively open-and-shut case. However you should certainly consult an IFA.
    A priority as soon as the diagnosis is confirmed.
    • xylophone
    • By xylophone 21st Sep 16, 9:57 AM
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    xylophone
    • #4
    • 21st Sep 16, 9:57 AM
    • #4
    • 21st Sep 16, 9:57 AM
    Remember you'll need an IFA who has Pension Transfer qualifications/permissions.

    https://www.unbiased.co.uk/pensions-transfer
  • jamesd
    • #5
    • 21st Sep 16, 11:22 AM
    • #5
    • 21st Sep 16, 11:22 AM
    Greatly reduced life expectancy is one of the situations where a transfer from a defined benefit pension to a personal pension is likely to make sense.

    Your expression of wishes for the death case can have the money go to anyone you like, whether you're under 75 or 75 and over. It's taxed as income to the recipient in the tax years in which they take money from age 75, before that it's tax free.

    In addition to the death benefit being far better, if you get to the point where your doctor is willing to say that your life expectancy is no more than a year you can take out the whole amount as a tax free "serious ill health lump sum". If that turns out to be wrong and and you live a long life there's no tax to pay later. You don't have to take it all this way, you can leave some in your pension and outside your estate.

    Peer to peer lending can currently offer some pretty good interest rates. I'd be looking to get around 10% taxable after allowing for bad debt.
  • jamesd
    • #6
    • 21st Sep 16, 11:23 AM
    • #6
    • 21st Sep 16, 11:23 AM
    Greatly reduced life expectancy is one of the situations where a transfer from a defined benefit pension to a personal pension is likely to make sense.

    Your expression of wishes for the death case can have the money go to anyone you like, whether you're under 75 or 75 and over. It's taxed as income to the recipient in the tax years in which they take money from age 75, before that it's tax free.

    In addition to the death benefit being far better, if you get to the point where your doctor is willing to say that your life expectancy is no more than a year you can take out the whole amount as a tax free "serious ill health lump sum". If that turns out to be wrong and and you live a long life there's no tax to pay later. You don't have to take it all this way, you can leave some in your pension and outside your estate.

    Peer to peer lending can currently offer some pretty good interest rates. I'd be looking to get around 10% taxable after allowing for bad debt.
    • jackyann
    • By jackyann 21st Sep 16, 11:34 AM
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    jackyann
    • #7
    • 21st Sep 16, 11:34 AM
    • #7
    • 21st Sep 16, 11:34 AM
    I had a friend in a very similar dilemma, my sympathies. My friend was also a very practical person in sorting out her pension & finances.

    Firstly, if the diagnosis is indeed myeloma, do tell the oncologist why you want a life estimate. I would also talk to the specialist nurse or treatment team to get an idea of what time you may need off work (see below)

    Using that, do your sums. You don't mention a 'death in service' payment, so I assume you don't have one, but do check, as it may make a difference.

    I would also be wary of assuming that your health during treatment will be 'good' - it is very variable. Also, some patients find they are better at work if they have synpathetic colleagues, others do not want to deal with the stress.
    So I would also factor in the kind of sick pay & sick leave you can expect from your employer.

    After that, so much depends on personality and how you like to deal with things.

    I wish you luck
    • PeacefulWaters
    • By PeacefulWaters 21st Sep 16, 1:50 PM
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    PeacefulWaters
    • #8
    • 21st Sep 16, 1:50 PM
    • #8
    • 21st Sep 16, 1:50 PM
    Death in service sits outside of the pension scheme.
    • Silvertabby
    • By Silvertabby 21st Sep 16, 5:09 PM
    • 104 Posts
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    Silvertabby
    • #9
    • 21st Sep 16, 5:09 PM
    • #9
    • 21st Sep 16, 5:09 PM
    Death in service sits outside of the pension scheme.
    It depends on the pension scheme. The LGPS, for example, pays a tax free lump sum of 3 x salary in addition to any spouse/child pension. However, this wouldn't be payable if the member had opted out of the pension scheme in order to transfer their benefits to another scheme, even if they were still employed /working at the date of death.
    Last edited by Silvertabby; 21-09-2016 at 5:13 PM. Reason: add
    • Teaandscones
    • By Teaandscones 21st Sep 16, 9:44 PM
    • 88 Posts
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    Teaandscones
    It depends on the pension scheme. The LGPS, for example, pays a tax free lump sum of 3 x salary in addition to any spouse/child pension. However, this wouldn't be payable if the member had opted out of the pension scheme in order to transfer their benefits to another scheme, even if they were still employed /working at the date of death.
    Originally posted by Silvertabby
    But there is nothing to stop someone rejoining the LGPS after having opted out (and possibly transferring out) so getting the life cover. The only risk would be the minimum one month gap between opting out and rejoining.
    • jackyann
    • By jackyann 21st Sep 16, 10:38 PM
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    jackyann
    Just to add: my friend had excellent advice from her union, who had a department just for this sort of thing.
    If you are in a union, I would check that out.
    • Malthusian
    • By Malthusian 22nd Sep 16, 10:38 AM
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    Malthusian
    Ok, so it could save inheritance tax but restricts me from dishing the money out to others.
    Originally posted by PeacefulWaters
    Not sure where you get this idea. You can nominate any number of people or charities to receive death benefits in whole or in part.

    The pension trustees technically have the final say over where it is paid (because it's their money not yours - held in trust for your benefit - which is why it isn't part of your estate). In practice they would always follow your wishes unless there is a really obvious reason why they shouldn't (e.g. your expression of wish is dated 2010 and nominates Mrs Joanna PeacefulWaters 100% and you divorced from Joanna PeacefulWaters in 2012).

    A priority as soon as the diagnosis is confirmed.
    Personally I'd find and contact one right now. The IFA will need to request information from your scheme and this takes for-ev-er. If it happily turns out that you have nothing to worry about, I doubt either of you will begrudge the wasted time.
    • Finst
    • By Finst 22nd Sep 16, 1:06 PM
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    Finst
    Many DB schemes have an option where you can convert it into a lump sum (as cash, not a transfer to another scheme) if you have a life expectancy of less than 1 year.

    The generosity of the conversion terms vary massively (from around 5 x pension to full transfer value), but if the conversion terms are good or you want some of the cash now (bucket list?) this can be a very good option.

    Need to think about inheritance tax as well, as it would be taxable if over IHT limits.

    Good luck!
    • Silvertabby
    • By Silvertabby 22nd Sep 16, 1:44 PM
    • 104 Posts
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    Silvertabby
    “ It depends on the pension scheme. The LGPS, for example, pays a tax free lump sum of 3 x salary in addition to any spouse/child pension. However, this wouldn't be payable if the member had opted out of the pension scheme in order to transfer their benefits to another scheme, even if they were still employed /working at the date of death.
    Originally posted by Silvertabby
    But there is nothing to stop someone rejoining the LGPS after having opted out (and possibly transferring out) so getting the life cover. The only risk would be the minimum one month gap between opting out and rejoining.
    Can't see it being done in just one month.

    1. Member tells employer she/he wants to opt out. Employer informs Pensions of opt out date and final pay details (after that month's pay run has been finalised). Mininum 2 months.
    2. IFA requests CETV, 1 month
    3. IFA considers members options and works out his/her cut. Who know how long.
    4. Transfer request received and processed. 1 month.

    Yes, these time scales may be shorter, but 1 month overall for an opt-out is unrealistic.
    • PeacefulWaters
    • By PeacefulWaters 22nd Sep 16, 3:19 PM
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    PeacefulWaters
    Thanks everybody for the added bits of clarity.
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