Stakeholder pension for my mum?

KGM_2

My mum will be 59 in May 06, and so retiring age of 60 in May 07. She's only have the State pension to survive on, so I'd like to see if there's something we (the kids!) can do to help her.

I'm led to believe I could invest £2,808 for her (or give it to her to invest) by 5 April 2006, a further £2,808 on 6 April 2006, and finally a further £2,808 on 6 April 2007 (just before her 60th).

With tax relief this would give her a pot of 3 x £3,600 = £10,800... say £11,200 allowing for a bit of growth over the 1 year it's invested (in cash?). Not much, but better than a poke in the eye.

25% of this could then be taken in May 2007 as a lump sum... that's £2,800, leaving £8,400 to buy an annuity.

Or am I right to think that as there's < £15,000 in the pot, the whole lot can be taken on her 60th?

I'd be grateful if anyone could sanity check what I'm thinking, and suggest some suitable companies through whom I could make these investments. Many thanks in advance.

margaretclare

Hello KGM

With the State pension only to survive on your Mum will be eligible for pension credit (the means-tested top-up). With this, she can also be eligible for things like housing benefit and council tax benefit. These things are very valuable, and some would argue that they're actually worth more than any late pension provision you, or she, could make.

That said, I couldn't live on SRP alone (thank God I don't have to). But I did foresee that we (that's husband and I) might be glad of a little extra in a few years' time, so I started a stakeholder about 3 years ago. I'm 70 now. I'll be able to access 25% of my 'pot' in August 2010. (We are way above the level of pension credit, that's with our combined pensions but state and private, otherwise it wouldn't be worthwhile). My stakeholder is with Friends Provident - have a look:

http://customer.friendsprovident.co.uk/products/pensions/;ms_jsessionid=DWCYXLUTQH5HACWCDY0CFEQ

As FP point out, every pound you put into the fund attracts 22% tax relief. So you put in £78 and it immediately becomes £100 to be invested.

Re annuities, the rules are changing in April this year - what's called 'A' day. You have to have less than £15,000 total in your pension fund to take advantage of what's called 'trivial commutation'. Of course, everything except 25% of this is taxable. After 65 she'll get a better tax allowance though - £7090 at present, this is set against her state pension and any private pension.

The experts will be along maybe on Monday morning to check your figures and set you straight. Your heart seems to be in the right place - you want to help Mum, good on yer!

I think the best place to be in the retirement years is to be above the need for means-tested benefits (all those intrusive questions!) but not rich enough to have to worry about inheritance tax. Lucky us!

Aunty Margaret

david78

KGM wrote:

I right to think that as there's < £15,000 in the pot, the whole lot can be taken on her 60th?

This is my understanding. It's probably only worth doing if you can take the pension as cash because the annuity she could buy would be something less than £400 per year. Thus she will only break even on the annuity compared to £8000 cash when she is in her eighties.

There are obviously other things to consider, eligibility for pension credit top-up and whether a small personal pension payment would affect this.

Really you need to wait until one of the pension experts has posted a reply to you.

Good luck though

dunstonh

This is my understanding. It's probably only worth doing if you can take the pension as cash because the annuity she could buy would be something less than £400 per year. Thus she will only break even on the annuity compared to £8000 cash when she is in her eighties.

First of all to clarify what is correct. If there are no other pensions (excluding state), then if the fund is less than 1% of the lifetime limit of that tax year (starting at £15,000 in year 1) then the whole fund can be taken 100%.

However, do not rule out the annuity if it comes to it. The annuity may be small in monetary values but when you actually look at the income payable against the net contribution made, the rate would be closer to 10%. There isnt anything else out there that is guaranteed to pay that sort of figure.

sleepless_saver

It sounds like she would be entitled to pension credit. The amount she would get from an annuity could well, depending on her circumstances, be less than the pension credit. Plus an annuity would have the effect of reducing her pension credit entitlement. The position may change after she reaches 65 when the pension credit rules change a bit.

There is a calculator on the pension credit pages of the Pension Service website which would let you try out the effects of the different options including age i.e. 60 to 64 and 65 or later. And she should ask for a pension forecast to be sure about what she would get as state pension.

She is really lucky to have children like you!:T

KGM_2

Well over six months have passed, but at last me and my mum have got things underway.

I bank with First Direct. They offer the HSBC Stakeholder Pension, which crucially has no minimum age / period to run. I think Friends Provident (above), and quite a few others, have a 5 year contribution period before it could be cashed in.

So what I've done is set up a direct debit for £234 a month. This gets topped up to £300 when the tax is added back in. Hence £234 x 12 = £2,808, which gives £300 x 12 = £3,600 - the maximum allowed in a year.

We'll run this for 20 months, which takes us to mum's 61st birthday. Could stop at 60, but let's get an extra year's contributions / tax relief.

So over the 20 months, that gives £6,000 contributions. All being well, I'll top this up with £2,574 (= £3,300 with Gordon's bit added in) on 06 April 2008, making a pot of £9,300.

Mum's 61st is May 2008. As the pot is <£15,000 (triviality rule), she can take the lot. This comes out as thus usual 25% tax free lump sum - so £2,325, with £6,975 subject to income tax. Now on current rates, her 0% band is up to £5,035, and then it's 10% on the next £2,150. So there'll only be just less than £200 tax to pay. In return, we'll have had just over £2,000 add in by Gordon. HSBC charges will come to about £50.

Just as an aside, running this on to mum's 62nd birthday would still have her below the £15,000 limit but withdrawing the funds would put her in the 22% tax band, so the benefits become pretty marginal.

Nationwide also seemed to have something similar, but an appointment was needed, etc.

Hope someone else finds this useful.