Options for investing capital to provide retirement income

worried50

She is one year off state pension.

atush

Who did your dad work for? If someone here does as well, they might know of the rules for survivors benefits of the pension?

worried50

Beechams.

The rule is - "In the event of your death before Normal Pension Date, your Paid-up pension will be cancelled. If, however, you are survived by a spouse then a pension would be payable to the spouse normally at a rate of 50% of your Paid-up Pension plus the revaluation element of the spouses GMP that will have accrued to the date of your death".

xylophone

Your father was a deferred pensioner of a final salary scheme.
Here is an example from Unilever. http://www.myupfpension.co.uk/index.php/final_salary/deferred/death_in_deferment

At the moment, the £200000 is all that is left of your parents' joint capital?

Has your mother looked into state bereavement benefits as post 4 above?

Will she be entitled to any other benefits? She now lives alone? At least single person's discount on council tax?

worried50

Xylophone

No she hasn't other than council tax reduction, so many thanks for pointing that out. The only element we were aware of was potential top up of her star pension, but she does not appear to be eligible for that as she has already paid enough NICs to get the full basic state pension.

We shall research and see if she is eligible.

atush

Well, you can work out the pension from Beechams by using his latest benefit statement, then reducing by 50%.

But I don't know if she will get it now, or at his normal retirement date so you'll have to ask them. Worst case is she will need funds to live on until her SP starts in a year.

jamesd

For something to work on, assume she can take £10,000 a year of income from £200,000 of investments indefinitely.

Assuming she defers the basic state pension for three years it would increase to £7,514 a year plus three years of inflation-related increases. If she was spending that from capital until taking it the £200,000 capital would drop to about £180,000 so the long term income would be around £16,500 from those two sources combined.

Given a bit more time to find out what her income from his pension will be it'll be possible to get a better idea of possible total income but it seems likely that it will be more than £20,000 a year, plus whatever his father is paying.

Looking at what his father is paying would be of use because it can be invested to produce an income that would survive his death. If he's not planning an inheritance for her then this may well be a better option than spending it as it is paid, though that may be attractive if she wishes to travel while she is relatively young and accept a lower income later. It would be worth learning of his intentions in this area so that she can plan around them.

For background, the income of an average pensioner is about £18,000 a year. Completely unrelated to her own circumstances, just context.

We really lack knowledge of her required expenses so it's hard to see how well off she'll be but from the look of it she should be fine in most parts of the country, with the possible exception of the south-east. Should be easy enough in Wales.

As you get more information it'll be possible to refine these things.

worried50 wrote: »

my father had always been living in the knowledge that he would inherit from his relatively wealthy parents. He's now died before both of them so won't inherit. I understand this will pass to my sister and I

That is what the laws of intestacy say and what would be expected to happen if a will specified him alone and was not changed. But wills can be changed. For example, his parents could set up a life interest trust with half of the money planned for him, with all income from that going to her but all capital to pass to her children on her death, while the remaining half goes to you and your sister immediately. She would be unable to spend the capital but the income would be hers.

His parents might also want to skip even more generations, since that is a good way of reducing future inheritance tax bills. Payments to say your children would skip your mother and your own potential inheritance liabilities. If they are minors it would be held in a bare trust for them automatically until they are 18, at which point they would get full control.

A discretionary trust might also be used, with your mother and her descendants as beneficiaries, with discretion used to pay to supplement her income with regular holiday payments and with occasional payments to others, such as perhaps house deposits for grandchildren or for you and your sister.

worried50

Many thanks James, that is so helpful.

Are discretionary trusts tax efficient do you know? A quick google says income is taxed at 42 - 50% over 1k, but the beneficiaries wouldn't be higher rate tax payers. So they would be able to reclaim any excess tax paid on income distributed to them?

I worked out my mother's expenses but don't have the exact figure to hand. Expenses including council tax, insurances, utilities, car tax, MOT, tv licence etc amounted to approx 350 pm from memory. Haven't been able to work out food and petrol yet as they've both been high lately due to my father's illness - lots of trips to hospital an hour away, and when he was out of hospital lots of food as he was trying to gain weight.

atush

What about food?

Have you called Beechams yet?

xylophone

You said that before your father's death, your parents were living on savings income, your mother's small pension and a regular gift from your grandfather.

In the purely financial sense, your mother will be better off? She will have a discount on Council Tax, the same savings /personal pension income as before, half your father's deferred pension and the gift from your grandfather? In a year's time she will also have the state pension - Incidentally, don't forget to keep an eye on your mother's tax affairs.

You are also looking into whether she will be entitled to any state bereavement benefits.
All I mean by this is that there is no immediate need to go chasing your tails about her income - sadly, you will have more than enough to do with dealing with the aftermath of your father's sudden death.

With regard to discretionary trusts, this will be a matter for your grandfather to discuss with a suitably qualified professional - I have said on numerous occasions (and don't apologise for repetition) that trust (and especially the taxation affairs of trusts)are complex- untangling mistakes is costly in time and money.http://www.step.org/

http://www.hmrc.gov.uk/trusts/types/ Start here.