Death before retirement age

MrAnalogy

Sorry if this question has been asked before, but I did try a search on the forum without finding anything especially relevant to my situation.

I am 57, with relatively poor health (kidney transplant, hypertension, diabetes type 2), not working and married.

I have 30 year's contributions to the State pension scheme, and two private pension "pots" (approx. £50k non-protected, £25k protected (until April?)).

My concern is, due to my health situation, that I may well not reach 65.

My Wife is already at pensionable age, but at present only receives about £60 per annum State pension (she is divorced, so obviously receives no benefit from her ex-husband's pension), although she does receive a very modest local authority pension in her own right.

She would be eligible for Pension Credit apart from the savings we have due to property down-sizing.

My questions are:- if I die before 65 will she receive some benefit from my State Pension contributions (Widow's pension?)?

Will my private pension funds both have to be used immediately to purchase annuities (any difference after April this year?), or can some or all of it/them be used as a lump sum to go to my estate (which all goes to her) so that she can decide what is best for her?

I did try posing these questions to the DWP a while ago, but could not get an answer from them.

Any thoughts or opinions would be appreciated. Thank you.

dunstonh

if I die before 65 will she receive some benefit from my State Pension contributions (Widow's pension?)?

If she doesnt have enough entitlement under her own NI then she can benefit from yours.

Will my private pension funds both have to be used immediately to purchase annuities (any difference after April this year?), or can some or all of it/them be used as a lump sum to go to my estate (which all goes to her) so that she can decide what is best for her?

If you die before you commence the pensions the full fund value is paid out as a tax free lump sum. (age is irrelevant other than current 75 cap). you dont have to commence them at 65 if you dont want to). Protected rights have to buy a dependants pension but that will change in April. (if you die before April, there are alternatives to annuity - however, enchanced terms on annuity may make it a worthwhile option)

it is a bit of irony that to get the most from a pension you need to die the day before you commence them.

MrAnalogy

Many thanks for your swift reply, dunstonh (I have seen many of your posts in the Savings section and they always appear to be eminently sensible).

It is a relief to know the situation is more or less as I believed it to be (I knew that the private pension funds would go to my estate when I was single - was not sure if it changed after marriage).

Based on your reply I confirmed (I think!) that if I did decease before 65 then my Wife would be entitled to a State pension based on my contributions, rather than a Widow's pension (unless, or course, she remarried).

Thank you once again - we are just updating our wills so wanted to make sure I was aware of the financial situation regarding my assets, potential or otherwise.

jamesd

The private pension funds don't normally go to your estate. They are normally held in trust and go to whoever you've identified in an expression of wishes form filed with the pension company. This way they are not subject to inheritance tax and can be paid out without waiting for probate.

You're able to take income from personal pensions from age 55 so you are already old enough for it to be possible for you. Even if you don't immediately need the money it can be useful to reduce the effect of a cap on income levels in drawdown (taking income from investments instead of an annuity) called the GAD limit. As soon as you take a lump sum or income the death benefits are reduced except when paid to a spouse or dependents, who will continue to inherit 100% of the value of the pots.

Given your health issues, if you did want to start taking an income now it would be worth considering using an IFA from unbiased.co.uk to see whether the income you can get from an annuity would be greater than from investments. There's still the disadvantage that the benefits for a spouse from an annuity will typically be lower than from drawdown but you may get a significantly higher income while alive, with lower risk than drawdown. This wouldn't be using a standard annuity but rather an enhanced or impaired life annuity, which pay out more because you're expected to live for less time.

It's probably worth waiting until the new tax year to do this if it interests you.

MrAnalogy

Thank you for your suggestions on the matter.

Indeed I had planned for my non-protected pension fund to be available at the age of 50 (because of my health issues) but am deferring it every 5 years as I am still around and kicking!

I have considered both draw-down and annuity, but the general consensus is that the "pot" is too small to be worthwhile for draw-down consideration, and that current annuity returns, even for impaired life, would not make much financial sense (even with 5 year guarantees) when one is not that confident of living for even a reasonable length of time (although I am doing much better than I thought I would!).

IHT is unlikely to be an issue (mirror wills leaving all to surviving spouse, and anyway estate unlikely to exceed even the single threshold - unless we win the lottery!).

My pension provider annually sends forms to allow me to nominate a beneficiary for the funds to be put into trust - I really should do it - but currently we ensure that we both have sufficient resources to continue whilst probate is being granted.

In addition, my son-in-law is an IFA (albeit a slightly unhappy one at the moment), so I tend to run things passed him for his general views on matters.

Thank you once again for your thoughts and consideration on the matter.

Best regards

jamesd

£75,000 definitely isn't too small for drawdown to be worthwhile. That can be OK down to even as low as £10,000 or so, depending on the costs of the place where the money is invested. For pure drawdown costs, Hargreaves Lansdown charges just £75 once every three years for a GAD limit calculation.

Charges vary at different providers, some might charge a few hundred Pounds for the same thing.

There used to be some FSA guidance about £100,000 being the minimum but these days that's just an indication where an IFA must take care to explain why drawdown is suitable. Your case is one where that should be very easy for an IFA to do: limited life expectancy, desire for spouse to inherit the pot to get a 100% spousal pension.

The size may still not be economical for an IFA charging IFA fees, depends on how much the IFA charges. But there's no strict need for an IFA or you could shop around for an inexpensive one if you need investment advice.

You wouldn't want to use only this fund but one commonly good starting point would be the Invesco Perpetual Monthly Income Plus fund. That's very popular amongst retirees and pays monthly income.

MrAnalogy

Thank you for the update on the current view regarding amounts viable for draw-down. I must admit it is a number of years since I looked into it, and indeed the figure of £100,000 was the one being used as an advised minimum.

I seem to remember though that there was some issue regarding taxation of the drawdown "pot" on decease that put me off it as well. I must confess that things may have changed now (or possibly I did not fully understand it in the first place!) that may make it a more attractive proposition for my current circumstances.

I presume though that although the situation will be changing with regard to protected rights funds, they are still not accessible until 65 (my provider was not specific about that - just that they were going to be treated like non-protected funds)?

However, I will definitely look again at drawdown possibilities, and assess whether in the short to medium term it could offer a better solution than continuing to defer my fund to leave a capital amount to my estate (in trust or otherwise).

One factor that is variable is of course how much longer I will live, which of course would be a great modifier on which would be a preferred option - but if we all knew that, then all financial planning would be very much easier!

Thanks again and Best Regards

jamesd

The key thing to know about the tax on your death is that your spouse or a dependent inherits with no tax charge. So your spouse will get 100% of the money.

For other people there is a 55% tax charge that applies if you've taken any money from the pension.This used to be 35% until it was increased in April 2011. Until your death they would also get 100%. If this matters to you, life assurance is the way to go to provide a lump sum to anyone affected.

Protected rights funds are also available from age 55 even before April. I forget when that changed. Maybe 2006 but something is tickling my memory to say it was earlier than that. Before April 2012 there are some more restrictions on protected rights funds than others. Mostly not relevant for drawdown but there are some rules relating to proportional taking of lump sums from protected rights and normal pots that might occasionally be irritating.

Providers don't have to allow everything that the law allows. It's entirely possible that some providers have more restrictive policies. Some of the big insurance companies in particular have some accounts in old systems that are limited and that they may not want to change. The solution in those cases is to transfer the money to a place that lets you do what you want to do.

You still may find IFAs who might not want to do drawdown for less than £100,000 even though it seems easy for an IFA to explain in your case. The problem for the IFA is that it works out badly, they are liable to pay you redress, so not doing it reduces risk for the IFA. So some just won't. Others will. Just depends on the IFA.

MrAnalogy

Yes - it was the 35% now 55% tax that really put me off in the first place, and it being based on the assumption that I was a wealthy higher-rate tax payer!

However, it seems that I did not properly understand it, thinking that on my death the tax man would swoop and cart off a large proportion of what was left regardless!

From what you say it would definitely appear I was mistaken in my belief.

If I understand you correctly, if I had a drawdown pension, if I pre-deceased my wife then she would benefit from the "pot" remaining without the 55% tax levy? Would that be "taking over" the drawdown, the drawdown being closed and the residue forming part of the estate in cash, or would it have to be converted into an annuity for her?

Also, if my wife pre-deceased me, what would happen then to the fund on my decease please?

Sorry to ask so many questions - it is just that if/when I go and consult an IFA I like to know as much about a subject as possible, and be able to ask (hopefully!) intelligent, pertinent questions.

Thanks once again and best regards...

jamesd

Correct, she'd get the pot without tax, assuming you didn't name someone else on the pension provider's expression of wishes form.

The money wouldn't be part of your estate but if there were no other clues to how you wanted the money distributed the pension plan trustees might look at a will for help in deciding who to pay the money to. Easiest just to fill in an expression of wishes form that says her if she's still alive, else whoever.

Your drawdown would be closed and the investments sold. She'd inherit the money within a pension in her name and could choose what to do with it. That could be drawdown or buying an annuity or some of each. Whatever she wanted or her advisor recommended.

If she died before you then whoever else you gave as alternatives in your expression of wishes form would get the money. Unless they were a dependent the 55% charge would be made. Dependents might include say a person under 18 or a person unable to look after their own affairs who you've been financially supporting. It wouldn't normally include adult children.

With expression of wishes forms the trustees of the fund have discretion but will normally do what it says. The sorts of case where they might not commonly involves children, perhaps after a change in relationship that hasn't been accompanied by a change in expression of wishes and/or a new child. The trustees have this discretion in part because it makes sense and in part because it is a legal requirement to avoid inheritance tax. Just tell them what to do. You can fill out a new form as often as you like.

MrAnalogy

Many thanks again for the clarification. This afternoon I have looked at approximate income that I could anticipate with the "pot" and GAD.

To be honest the amount was a little disappointing, and I am not sure it would be the right option for me. The main reason is the tax liability if my wife pre-deceases me - I am stuck with something that does not really pay out that much in income, that I might not enjoy the benefit of for very long, and then the Tax-man getting most of it!

Also if I die first, then if I understood what you were saying, although the remainder would be exempt from the 55% levy, it would have to be used as a "pensiony" sort of thing by my wife (annuity/drawdown). Whilst this may suit her needs at the time, it does reduce the flexibility of her actions.

This afternoon I have also put in train a request for quotes for an impaired life annuity. Although I feel quite well and am certainly not at death's door (not that I am aware of, anyway ), it will be interesting to see what they come back with.

Hopefully armed with that information, I will better be able to consider and compare my various options (in discussion with my wife), and hopefully move forward with some sensible financial planning.

Phew! I now know why I have been procrastinating so much about doing this - it is hard work and giving me a headache!

Thank you very much again for your posts - they certainly have helped me focus on the various options and assisted in directing my internet research.

Best Regards