Retired - newly diagnosed with cancer

waveneygnome

A relative of mine has just been diagnosed with aggressive prostate cancer, and prognosis is not good.

He only retired last year, and I was wondering if there is anything he could do to financially improve what time he has left.

His income comes from:

State pension - circa £7k pa
Defined Benefit scheme - circa £8k pa
Sipp in drawdown; value approx £120k - circa £6k pa

I have previously read about enhanced pensions for people who are diagnosed before retirement. I'm guessing that once you have retired/crystallised then unfortunately my relative is one of the unlucky ones who will not reach the average living age and will be funding those who are fortunate to exceed it.

However is there any enhancement he can take via his Sipp?

TBH money is not a priority at all for him now, but I wanted to suggest something that could cheer him up/get him an extra holiday.

Your_Hero

I'm sorry to hear about this.

Nothing he can do re state pension and usually the same with the DB scheme in payment, although there may still be a dependent's pension payable and/or lump sum upon death.

The SIPP is in drawdown already, so as this was drawn last year when he retired, the chances are that this is under a capped drawdown arrangement. He can draw up to 150% of the GAD rates (equivalent to annuity rates roughly), which he probably isn't doing at present since the previous limit was capped at 120%.

However, another possibility, is he could move his drawdown pension into "flexible drawdown" since he meets the minimum income requirements (MIR) of £12,000 p.a. from pensions (reduced from £20k since the Budget of this year). This means he will be free to draw as much income as he likes and no longer restricted by the cap.

Alternatively he could wait until April 2015 when capped drawdown limits are removed totally, but I'm guessing the former option would probably be his best bet if he wants to enjoy more money now rather than later.

jamesd

The enhancement that you may be thinking of could be either an enhanced annuity that pays out more based on reduced life expectancy or a scheme pension that does the same. The annuity really isn't a good idea given his apparent medical condition. A scheme pension might still be of use if it is expected that he will die before the new rules come into play but better to wait for the new rules if possible.

Thinking further ahead, the remainder of the value in the SIPP can be taken by a spouse, including civil partner, into a pension of their own tax free. If they take it outside there is a 55% tax charge, which also applies if someone other than a spouse gets it. It has been announced that this 55% is to be reduced but the final rules aren't yet known and probably won't take effect until April 2015. Those payments are not part of his estate for inheritance tax. Because the income tax rate from taking the money is less than 55% it may be better to take the money out before death and give it away unless it's to go to the pension pot of a spouse. Such a gift would become part of his estate for inheritance tax so would not be a good idea if his estate is affected by that.

He should also check with his workplace pension to see about its death benefits.

One potential use of money of this sort is to ask his doctors whether treatments that may be more effective are available but not on the NHS. The lump sum may be able to be used to improve his odds of surviving.

He cannot do the things I describe in the rest of this post because he has started to take benefits already and it is only allowed if that hasn't happened but it'll be of possible use to others who haven't. Or him if he happens to have any pension pot that he hasn't taken benefits from yet.

If his doctors are willing to say that he has a life expectancy of one year or less he can have full access to the whole of the SIPP now, without waiting, as a serious ill health lump sum. This is better than using flexible drawdown because the whole of a serious ill health lump sum is tax free.

He can also contact the defined benefit scheme trustees and ask them whether they offer a similar capability. They are allowed to, but whether the rules of the scheme also permit it depends on the scheme and it's the scheme rules that determine whether it is possible.

If his doctors will not yet say that his life expectancy is one year or less he has the options described by Your Hero. However, because it's likely that he will at some point qualify for a serious ill health lump sum with no tax it's better not to take money faster than required, so that as much as possible can be taken as a serious ill health lump sum tax free.

But again those last three paragraphs do not apply to him unless he has some other pension that hasn't been mentioned.

Your_Hero

jamesd wrote: »

If his doctors are willing to say that he has a life expectancy of one year or less he can have full access to the whole of the SIPP now, without waiting, as a serious ill health lump sum. This is better than using flexible drawdown because the whole of a serious ill health lump sum is tax free.
.

To my knowledge, this rule only applies to uncrystallised benefits. Since he has been placed in drawdown, the benefits have been crystallised and unfortunately won't be able to do this.

Serious ill health lump sum:
Individuals with a life expectancy considered by their registered medical practitioner to be less than one year may be able to commute their uncrystallised funds as a serious ill health lump sum.

Commutation must fully extinguish the member’s entitlement under the arrangement(s). Although survivor’s benefits will need to be retained in the scheme if the arrangement contains an entitlement to a Guaranteed Minimum Pension.

Crystallised pension benefits may be not be commuted for this purpose. This means a serious ill health lump sum may only be paid from:

-uncrystallised benefits, or
-if the member has reached age 75, benefits which have not been put into payment.

http://www.aviva-for-advisers.co.uk/site/public/tech-centre/retirement-planning-options-pension-options-when-in-ill-health

jamesd

You're right and that's why the part of my post immediately before that section began with "He cannot do the things I describe in the rest of this post because he has started to take benefits already and it is only allowed if that hasn't happened" and ended with "But again those last three paragraphs do not apply to him unless he has some other pension that hasn't been mentioned".

He probably doesn't have any other pension pots but I thought it worth mentioning just in case he has.

Your_Hero

Ah right, I blame myself for late night reading

waveneygnome

Thanks for the replies.

I have passed on the suggestions made.....one of which he has already taken up this morning......getting to see a consultant privately (2 day wait) or the same consultant on the NHS........11 week wait.

One thing I didn't understand jamesd:

'Because the income tax rate from taking the money is less than 55% it may be better to take the money out before death and give it away unless it's to go to the pension pot of a spouse.'

(His spouse has a great LGPS, and she has been retired for 5 yrs already. With LGPS, state & B2L income she is comfortable with her level of income)

He is keen to crack on with some bigger DIY projects extension/kitchen/redecorate throughout to leave the house in top condition for his spouse, therefore access to the Sipp money could be useful.

As I understood it, if he took the money from the Sipp = 55% tax charge, where does the income tax bit fit in?

Your_Hero

waveneygnome wrote: »

Thanks for the replies.

I have passed on the suggestions made.....one of which he has already taken up this morning......getting to see a consultant privately (2 day wait) or the same consultant on the NHS........11 week wait.

One thing I didn't understand jamesd:

'Because the income tax rate from taking the money is less than 55% it may be better to take the money out before death and give it away unless it's to go to the pension pot of a spouse.'

(His spouse has a great LGPS, and she has been retired for 5 yrs already. With LGPS, state & B2L income she is comfortable with her level of income)

He is keen to crack on with some bigger DIY projects extension/kitchen/redecorate throughout to leave the house in top condition for his spouse, therefore access to the Sipp money could be useful.

As I understood it, if he took the money from the Sipp = 55% tax charge, where does the income tax bit fit in?

55% tax charge is upon death in drawdown or unauthorised payments. If he draws as income, max is 45%. This applies to flexible drawdown.

Since he has a spouse, it's probably best to not draw this income out in full, unless of course he is spending it ASAP. This is because with current rules, if he is leaving the pension to his spouse, she can continue to draw an income from this, or none at all, and taxed at her marginal rate (e.g. income tax rates 20%, 40% or 45%).

jamesd

Good to read that he's used the private option!

Your Hero explained but I'll do it again differently just in case that helps.

When a person dies after taking benefits form a personal pension, the whole remaining pension pot is paid out, normally to whoever he's named in an "expression of wishes" form sent to the pension firm. This payment is outside his estate and not subject to inheritance tax. The payment can be made in two broad ways:

1. To a spouse or a very limited set of financial dependants, into a personal pension pot of their own. There is no tax charge for this.
2. To anyone outside a pension after a 55% tax charge is deducted. Including to the spouse.

He can also use flexible drawdown or if he lives until April 2015 or later the new unlimited drawdown that is expected to be introduced then. If he uses that approach to take money beyond the capped drawdown limit there are two main effects:

3. The money he takes is added to his taxable income in the tax year in which he takes each amount and normal income tax is due on it, potentially at some mixture of 20%, 40% or even 45% income tax rates.
4. The money becomes part of his estate and potentially subject to inheritance tax if the estate will be large enough for that to matter.

I didn't know that he had a spouse originally and since he has one it's probably best to leave all the money that he doesn't need in the pension pot so she can inherit it tax free into a pension pot of her own. The reason is to minimise the total tax bill. He could usefully take the money to use up all of his 20% tax band, say. Then she could do the same in later years if he does die, using her 20% band.

Or of course he could take more if he needs more and accept paying 40% or even 45% income tax on some of it. But rather than paying 40% or 45% income tax it would probably be better to do some borrowing and then repay the money later from more gradual drawing of the money at 20% income tax by the surviving spouse. Potentially a modest mortgage, or credit card 0% for spending deals could be used for this. It's just a tax dodge, knowing the rules and looking at ways to minimise how much tax gets paid.

There's an added wrinkle here. On Monday of this week we learned that the 55% tax charge is to be reduced but we don't now what the new rate will be, other than that it is expected to be a significant reduction. That isn't likely to happen before April 2015 but we should know the planned rate sooner, perhaps it'll be announced during the Chancellor's Autumn Statement.

What that pending change means is that if there's any chance of him living to after April 2015 it'll be best not to take more money than he strictly needs until we know the new rules. While today it's better to take the money sooner, at least up to the top of the 20% tax band, that may not be true come next April. So a bit of a holding plan is best for now, except of course he should draw any money that he has use for because that's more important than the tax planning - though borrowing will be cheaper than going into 40% tax band.