Death before retirement age

jamesd

Chances are that the impaired life annuity will have lower payout levels, though perhaps not initially because the GAD limit is currently exceptionally low because of record-breaking low gilt yields. At the moment it's 4.6% per year for a man aged 57 with 2.5% gilt yield.

Annuities usually have much worse inheritance treatment. I'm not aware of any lifetime annuities that will pay even 1% out to beneficiaries if your wife was to die before you. If you die first and want one that will pay out long term to her that will probably substantially reduce the payout you get because it'll end up being governed by her life expectancy rather than yours. May or may not be the best idea, just letting you know what you may find and why. Usual annuity treatment unless you say otherwise and take a reduction in income is nothing to anyone else after your death.

You have one more option to consider, a "scheme pension", a form of drawdown. Instead of using the GAD limit that assumes good health this uses an actuary to work out how much income you can have based on your own medical history. If your health gets worse you can ask for a review to adjust income level at any time, for a fee. While the up front and potentially ongoing costs are significant this might end up being the best option to provide both high initial income and an inheritance for spousal income. It won't avoid the inheritance treatment that we've discussed, just boosts your own income level while you're alive.

If you find that an impaired life annuity pays significantly more than a standard annuity it'll probably be worth checking the scheme pension route to get he better inheritance treatment than an annuity offers.

Here's some reading about scheme pensions:

FT story, click on first result, title "‘Scheme pension’ can pay more than drawdown plans".
Some information from one provider
A caution about a possible rule change that makes it desirable to act before April if a scheme pension looks best for you.

MrAnalogy

Scheme Pension - not something I was aware of so thank you for drawing my attention to it.

I followed your links (just as well you provided them - very difficult to find very much at all about the subject via search tools!) and found them very interesting.

Certainly it sounds more like what I was looking for - the scheme objective being to maximise income but minimise the contents of the fund by the time of decease, achieved by management and actuarial input/control (in my mind an "impaired life drawdown", rather than the standard drawdown which takes no account of an individual's health).

However, listening to what was being discussed on one of the links, they were suggesting fund figures of £200k, or at least closely approaching 6 figures - something I am sadly not that near to. I presume they advise this figure because of the high charges and actuarial costs which would have a more significant impact on smaller funds.

Also I can understand why the Government hates the concept (not necessarily for my possible use for it, but I can see others more wealthy than me seeing an advantage in it as a tax-planning tool) and it looks as though its potential usefulness will soon be denied to me anyway by proposed legislation.

I seem to have come full circle again like the last time I reviewed my situation (although I now believe myself to be much better informed about things than I was, thanks to you and Dunstonh).

It is looking again to be that my best option is to do nothing (except, possibly, to request my provider to trust allocate my funds to my wife if I die before using them, to by-pass probate), and look at it again if my wife pre-deceases me.

Thank you once again for your patience with my financial ignorance - even if I take no action I feel that I have at least considered the possibilities and that I have not overlooked an obvious and beneficial solution.

Best Regards

jamesd

Costs and health vary. They probably used £200k because that's twice the FSA's figure for small pots so that reduces the chance of regulatory pain for them.

Capped drawdown should beat doing nothing.

MrAnalogy

Capped drawdown - maybe - but it does not take into account at all my health situation, and the current rates of return are not attractive enough to take the risk of my wife pre-deceasing me, and me perhaps not living much longer after so that the Government will take half of it.

Better, I think, to leave the fund untouched, to permit maximum flexibility of options at some time in the future. Although the 25% lump sum would be useful at the moment, I can not help my strong dislike of the possibility that either the Government or an Insurance company will significantly benefit from my (known) medical conditions by claiming a large proportion (or all of it) of my fund.

I know this is a fact of life, and that when you make pension provision it is always a gamble as to who will come out ahead based on how long you live, but in my situation, being realistic, the odds are fairly heavily stacked against me already!

Anyway - I will still be interested (although as you suggest, disappointed) in the figures I get back for an impaired life annuity - you never know - I might be pleasantly surprised! :rotfl:(although, if the figures are good, it must mean that I am worse than I thought!)

Thanks again for your help, and best regards

jamesd

Also worth checking out life assurance rates since that could take care of the wife predeceasing you case.

MrAnalogy

Sorry - I am not quite sure what you mean. My primary concern is to ensure adequate provision for my Wife, whilst trying to minimise the amount of fund "lost" to agencies other than her. If she pre-deceases me then my concern there is resolved - unless I am locked into a solution that pre-supposes that she will outlive me.

Perhaps I have a misconception about Life Assurance (too many adverts on the T.V. about "over 50 plans" perhaps ), and was a little unsure as to whether you were suggesting L.A. for her or me.

For her it would not address my primary objective (and would involve expenditure not related to the pension fund?), and for me - they would not touch me with a very long barge pole (well, probably for an over 50 plan maybe) with my medical history.

I think, perhaps, that I have not fully understood your suggestion - me being dim again I am afraid!

Best regards

jamesd

I was thinking of life assurance for you to cover the 55% tax charge if your wife was to predecease you. The cover needed is only £40,000 or so and that may be cheap enough to buy via an IFA from the extra income you're getting in drawdown. I think it's worth checking cost and maybe you'll get a pleasant surprise.

What I'm trying to do is find a way that gets you the extra income without harming the inheritance treatment or using all of the extra income.

MrAnalogy

I do appreciate the ideas and suggestions you are making to help with my objectives, but I think it is worth just restating what those are.

My first objective is to try and ensure that my (older) wife has sufficient financial provision should I pre-decease her.

My secondary objective is to try and minimise as far as possible the loss of funds to either the tax-man or an Insurance provider. Although this is an impossible dream I am just looking for a reasonably level playing field that reflects my health situation.

Standard drawdown does not take medical condition into account; annuities do (or could) but as stated the rates are at record lows; no action leaves the fund intact and flexible, but denies access to the lump sum and possible income; and possibly the most attractive option - Scheme Pension - albeit with high charges, looks set to be barred to smaller (or all?) funds due to proposed changes in legislation.

With regard to your latest thoughts, I have looked into Life Assurance before - but in the same way that I am hoping to benefit from enhanced income from an impaired life annuity due to my health situation (if I go that route), the same situation makes me un-insurable for life assurance (except with non-medical over-50s plans that would make no financial sense, as I am looking to increase my income rather than use it to fund another financial product).

I hope I am not coming across as being totally negative towards your suggestions - I have found them very interesting and have carefully considered each one, and feel more than satisfied that I am now far more aware of what options are available, and the advantages and disadvantages of each one.

Once again thank you for your time and patience in making these suggestions, and explaining what they are and how they work.

Best Regards

SallyG

That 55% tax on what's left in the posthumous drawdown pot - why is it 55% - what are we punished for?

atush

tax and NI relief?