Stakeholder for wife and me - Yes or No?

4richa4pora

Hi,

I am a 52 yr old retired schoolteacher with an associated teacher's pension, my wife would receive 50% of my pension should I die.

My 50 yr old wife has cared for our family and has never paid into the government or private pension schemes.

My wife and I have invested the max amounts permissible in TESSAs, PEPs and ISAs to date from launch; we also have regular savings plans with the Derbyshire etc and top league savings accounts with ING, Hfx Websaver, A&L Online etc.

We also have a few unit trusts etc.

We own our home and have no debts.

Mirror wills which make use of both nil rate band Inheritance Tax Exemptions using Discretionary trusts are in place.

I have always had an aversion to paying into any scheme where I could not eventually retrieve my money should I require it, and have therefore avoided a Stakeholder plan for my wife.

NOW THE QUESTIONS

1. We now have surplus funds and could afford to pay the max amount per year into Stakeholder for my wife. Is this a good idea, or will the likely smallish accrued sum at 65/70 simply produce a pension for my wife which cancels out any state pension to which she may or may not be entitled should I die?

2. Is a widow who has not made any pension contributions likely to receive any pension from the government should I die?

3. My teacher's pension and investment income is sufficient to keep me paying tax throughout retirement and therefore the pension I would receive if I set up a Stakeholder for myself would be taxable. Is there any point in me setting up a Stakeholder for myself?

4. How about an immediately vesting Standard Life option for myself?

Thanks for your thoughts!

dunstonh

1 - A stakeholder pension or any other investment has no impact on the state pension entitlement.   Therefore you making contributions will not impact on your state pension.

2 - If she was widowed after state retirement age and not entitled to a pension in her own right, she should be able to get a retirement pension based on your contributions.  If she does receive some pension, but not the full basic pension, she may also be able to use your NI contribution record to bring her basic state pension up to a higher level.

3 - Yes, if the investment style of the stakeholder pension suits your goals.  No if it doesnt.   You do not have to take the stakeholder at age 65.  You can leave it to 75.  If you die before taking it, your wife will receive the fund tax free.  It can be a way to boost your income later in life.  

4 - I cant see any reason you would consider an immediate vesting personal pension with Standard Life or any other provider for that matter.  These are mostly used with open market options or those looking to use up pension allowances (and take an immediate income as they are retired) and gain the tax relief (useful when 40% tax payer).   Can you give your reasons why you are considering this as an option?

4richa4pora

Thanks DD for your clear and incisive responses to my questions!

Whilst I am alive we have sufficient income from my pension, our savings & investments etc to support our retirement lifestyle, but my wife's lack of any self owned personal/private pension to assist her if I die first gives me some concern.

I dislike the idea of putting money in a pot from which it cannot be recovered other than by annuity. For this reason we have used the ISA route, which lacks the upfront tax advantages, but as I understand it:
1. can be accessed at any time,
2. does not have to be invested into an annuity,
and
3. with care the proceeds can be taken without payment of income/capital gains tax.

But, if proceeds from a Stakeholder annuity do not in any way decrease state entitlements it seems like a sensible additional investment for my wife, and possibly myself.

Why did I consider an immediate vesting Stakeholder for myself? - I believe I have seen documentation from various discount brokers which appeared to recommend this as a way of obtaining the tax top-up to a £2808 annual contribution, and then by withdrawing 25% of the then £3600 as a lump sum you leave £2700 to commence the annuity. I think they were promoting this as an effective way of utilising the tax top-up, just making the investment yield per £x of my money invested higher. Is this likely?

Is 75 the oldest age at which the investment of the fund in an annuity is compulsory?

In your reply (3) you state

If you die before taking it, your wife will receive the fund tax free.

I assume that you mean she could take the entire fund income/capital gains 'tax free' as a lump sum?

If we both left the funds intact until our deaths. Would our family be able to inherit the funds tax free or would they be an addition to our existing inheritance tax liabilities?

I genuinely appreciate you spending time answering the above. In my opinion this type of impartial information can be difficult to obtain from many investment advisors (as they may have axes to grind), and the 'money pages' of newspapers do not always go into the depth of responses required. Thanks again!

dunstonh

ISAs that are in corporate bonds and gilt funds are also free of income tax within the fund, unlike equities which have 20% tax taken from the income distributions at source. Although that would really only be an issue if you were looking for income or really dont want the tax man to get anything.

Why did I consider an immediate vesting Stakeholder for myself? - I believe I have seen documentation from various discount brokers which appeared to recommend this as a way of obtaining the tax top-up to a £2808 annual contribution, and then by withdrawing 25% of the then £3600 as a lump sum you leave £2700 to commence the annuity. I think they were promoting this as an effective way of utilising the tax top-up, just making the investment yield per £x of my money invested higher. Is this likely?

This is exactly the same as buying a stakeholder but commencing it immediatly rather than sitting on it. Why commence it immediatly? You dont need the income now and if you buy an annuity at 52, you will only get a fraction of what you would get at age 65 (or higher).

A pension, whether it is stakeholder or personal pension, gains tax relief. You can pay in £3600 gross (2808 net) and take it immediatly (immediate vesting) or leave it until a maximum age of 75. If you leave it, you will get growth on the whole £3600 (when the cheque written was for £2808) and each year you get older, the annuity rate will get higher. So leave it as long as possible.

Think of a pension as an investment product with a different way of maturing than normal.

In your reply (3) you state Quote:If you die before taking it, your wife will receive the fund tax free.



I assume that you mean she could take the entire fund income/capital gains 'tax free' as a lump sum?

Correct. If the fund hasnt been used to purchase an annuity and is still in the pension, the fund value at date of death will be paid to the person nominated, subject to the pension trustees agreeing with the nomination.

If we both left the funds intact until our deaths. Would our family be able to inherit the funds tax free or would they be an addition to our existing inheritance tax liabilities?

Assuming you both build up your own stakeholder arrangements and you dont commence the benefits. On first death, the surviving partner would be paid the fund value tax free. On second death and same assumptions as before, the fund value of the pension would not be included in the estate for IHT purposes as a pension is a discretionary trust. This can be a very useful way to dispose of assets when you do not expect to live beyond 75. However, if you go to age 75, you will be forced to commence the annuity (although you can take 25% as usual). You would be wise to consider a 10 year income guarantee on the annuity at that time! If you then die at 76. The annuity provider would pay the remaining 9 years, often commuted as a lump sum, into the estate.

So it has the potential to lower your IHT liability if you dont live beyond 75. Sometimes it would be so much easier to know your date of death

Ironically, to get the most out of your pension, you need to die before commencing it.

I genuinely appreciate you spending time answering the above. In my opinion this type of impartial information can be difficult to obtain from many investment advisors (as they may have axes to grind), and the 'money pages' of newspapers do not always go into the depth of responses required. Thanks again!

Its not as hard as you think. There are lots of us out there who have no axes to grind. Its just like any service industry. Some are good, some are bad and its knowing where to go. Just make sure its independent advice that you get.

Newspapers are risky to use. Good for ideas but 5 years ago, for example, the papers would have league tables comparing ISAs invested in corporate bonds against technology funds showing how much better the tech funds were performing. Any advisor would tell you that they are two different styles of investments with massive differences in risk. However, many daily mail readers stay away from advisors because they perceive them to be bad and follow what the mail tells them to do. The media is not regulated by the financial services authority and gets away with saying things that advisors would never dream of saying.

My view of your situation is that you should investigate stakeholder contributions further for both you and your wife (as what else makes £792 overnight). However, i can see no reason from what you have posted as to why you should immediate commence the pension. Also standard life have only come out on my lists as best annuity provder once so far this year so i wouldnt have used them anyway.

4richa4pora

Thanks DD - I will NOW certainly investigate stakeholder contributions further for both me and my wife.

Immediate vesting looks like a no need non starter for us.

I really like the inheritance tax effectiveness if the annuity has not been started up to the age of 75. (but don't know if even I would be prepared to arrange an early departure just to avail my family of this advantage) ;D

Thanks again - I really appreciate your advice!

4richa4pora

In my search for the 'best' Stakeholder pension I decided to telephone assorted providers to ask for their literature.

I would then make a decision and either deal through an IFA or a Discount Broker.

But only a very few companies were prepared to send me their literature.

Is this a situation imposed by FSA or is it just a ploy to encourage me to deal through their represantatives only?

dunstonh

The FSA need to be aware of the distribution methods of the company and make sure that all compliance requirements are in place for that method of distribution.   If a company doesnt have a direct distribution arm, it cannot send you out details.  

Where a company does have a direct distribution arm and provides to tied advisors or IFAS, the product can differ between all 3 methods to reflect cost and supply or it can be the same product.   Additionally, they may offer a limited range via one method but a greater range via another.

Some IFAs will offer different terms to other IFAs on a product as well. This can depend on the network they use (ie, network specific special offer) or the amount of business they place with a particular provider. This can be in the form of improved commission terms and maybe they rebate some to the client to lower charges or increase allocation or there may be improved product terms from the provider for that network or IFA.

4richa4pora

We now have literature from Legal & General, Norwich Union and Standard Life.

Although we realise past performance does not indicate the future we think our next move may be to check the funds in Money Management magazine or similar and to try to settle on an investment which matches our level of acceptable risk.

We have already checked up-front and annual deductions etc.

When we finally strike the deal we will be aiming to put the pension fund in trust for our family so that it is transferred directly to them (outside our estate) should my wife die before starting the annuity (up to the age of 75). It would be essential that the fund did not count as part of either my or my wife's estate. Is there a simple pro-forma for doing this or would it require input from a solicitor?

Thanks again - we both appreciate you spending the time to clarify and focus our thoughts so effectively!

mutley74

why not consider a SIPP?

It means you can invest your money in any share/stock/gilt and commercial property funds and cash as you like.

look are https://www.hargreaveslansdown.com for a starting guide

Pal

Chipz - Do you work for Hargreaves Lansdown or otherwise have an interest in promoting SIPPS? If so I would be grateful if you could declare it.

mutley74

Chipz - Do you work for Hargreaves Lansdown or otherwise have an interest in promoting SIPPS?  If so I would be grateful if you could declare it.

Pal,
no i dont work for hargreaves lansdown and not on any commission or anything, and ont work in financial services sector (although i wished i did at times). I only suggest them as a point of info. I have many of my personal financial businesses via them, and find the service very good and reasonable.

I suggest SIPPs, as i think and find them more flexible than a stakeholder, and i think one should not overlook or at least be aware of them when looking for a personal pension plan.