Inherited pension pots and new pension freedoms

Aged

My spouse died recently and I am to inherit their accumulated pension pot. Under the new rules, I believe I can inherit this sum as a 'pension' and keep it as a 'pension', meaning that it stays sheltered from tax and I can withdraw as and when I like and the withdrawals will be tax free.

The other option is to withdraw the tax-free lump sum and invest it outwith a pension wrapper. I'd appreciate some opinions on which would be the best course of action?

dunstonh

Sorry for your loss.

If you are under 75 and the pension is not crystallised then the full pension value is paid out tax free. You can then contribute back into the pension (subject to annual allowance) and get tax relief.

Using a stocks and shares ISA in combination with it could be better too (take the lump sum tax free, put the money into the ISA and draw from it when necessary tax free).

atush

Sorry for your loss.

Can say approx the value of assets you might have to deal with overall? As an IFA might help.

I think the idea of taking the pension and then reinvesting in a pension for yourself is a very good idea esp if you are still working and earning. And if you have income this year, it would be a good idea for you to start a pension quickly, depositing some cash before april 5th. You can always decide how to invest it later. if you go S&S isas too, it would be a good idea to depeosit this year's allowance if you ahve not used it.

Aged

No I'm not earning. I am retired due to ill health, but under retirement age. My ISA allowance for the current year has been used already. Approx. value of pension assets is £400K. Have taken advice, and also a second opinion and both advise different approaches, hence the dilemma.

atush

taken advice from whom? And how do the approaches differ?

So you can't reinvest in a pension (well above 2880/3600 a year) but you can use next year's S&S isa allowance. Any ISas they had can be kept as same and moved into your name.

Is your house suitable to live in re your health (esp w/o the support of a live in partner)? Does it have a mtg? Any other debt?

If the pension was unchrystalized, it would make sense to have it as a tax free lump sum in it's entirety, and invest it (apart from at least 2 years living expenses in cash) for your future income.

Do you have any dependents? Will your two estates be worth more than 650K?

Aged

atush wrote: »

taken advice from whom? And how do the approaches differ?

Advice from two FAs. The different approaches are explained in my original post.

So you can't reinvest in a pension (well above 2880/3600 a year) but you can use next year's S&S isa allowance. Any ISas they had can be kept as same and moved into your name.

I'm not thinking of investing in a pension. I intend to use next year's ISA allowances. Spouse had no ISAs.

Is your house suitable to live in re your health (esp w/o the support of a live in partner)? Does it have a mtg? Any other debt?

I own the property outright, no plans to move, no debts.

If the pension was unchrystalized, it would make sense to have it as a tax free lump sum in it's entirety, and invest it (apart from at least 2 years living expenses in cash) for your future income.

That's what one adviser has recommended. The other recommends keeping it as a 'pension'.

Do you have any dependents? Will your two estates be worth more than 650K?

No dependents.

System

Aged wrote: »

That's what one adviser has recommended. The other recommends keeping it as a 'pension'.
.

It depends really on whether you have a need for lots of cash now, or whether you prefer to invest / keep invested for longer term growth with the intention of drawing income at some point later.

Cash now would be tax free, but then you would want perhaps to get it back inside a tax-free wrapper, which would take time using ISA allowances. AFAIK under the new rules you have the option of leaving an uncrystallised pension as a pension, which would remain in a tax shelter.

Perhaps it depends on your needs and attitude to risk. In a somewhat similar position I opted for some cash to do house repairs/improvements and a few capital purchases, and then left the rest safely untouched as a future pension. A pension is always a pension, but cash has a way of seeping away if not watched.

jamesd

Aged wrote: »

My spouse died recently and I am to inherit their accumulated pension pot.

The standard way to do this if they had taken no benefits has been to take it all as a tax free lump sum. This option is available both now and after 6 April. From 6 April it is also available if they had taken benefits, formally called crystallised, and were under 75 a the time of death.

The critical change here is that with the new rules the money in the pension if they were under 75 is tax free and immediately accessible if it is left in the pension, just like a super-sized stocks and shares ISA and without a cap on the level of income. The first FA knows that, I'm not sure that the second does. Ask them, putting it much as I just did about the tax free income and it effectively already being money in a super-sized ISA.

Use caution with replies here unless it's clear that the poster knows about this rule change because it's a big deal and means that the best answer changes.

Aged wrote: »

Under the new rules, I believe I can inherit this sum as a 'pension' and keep it as a 'pension', meaning that it stays sheltered from tax and I can withdraw as and when I like and the withdrawals will be tax free.

That can be an interesting option because it provides a tax shelter on the growth and income while letting you draw the money to fill up an ISA each year as well as meeting your other needs.

Aged wrote: »

The other option is to withdraw the tax-free lump sum and invest it outwith a pension wrapper.

That would be the standard and best way to go before the changes on 6 April. With those changes it's better to leave it in the pension instead because the pension has become like a super-ISA for you.

From the two replies it appears that the second FA hasn't yet fully integrated the changes from 6 April into their planning process and the first one has. So the first seems to be doing the better job of being current with the changes to the rules.

You should think of making pension contributions. There is no reason not to make them and get the 20% income tax relief on the money going into the pension. You can only pay in 2880 a year but the tax relief is worth having.

For protection against changes in the law you should take out enough each year above your needs to fully fund a S&S ISA.

Just so you know, a common guideline is that you can take out 4% of a pension pot increasing with inflation each year and expect not to have to greatly reduce the income when you get close to end of your life. That means around £16,000 a year. If you are not yet of state pension age you can increase that, knowing that the state pension will top it up later. Similar for any work pension you're not yet getting.

Aged

jamesd wrote: »

The critical change here is that with the new rules the money in the pension if they were under 75 is tax free and immediately accessible if it is left in the pension, just like a super-sized stocks and shares ISA and without a cap on the level of income. The first FA knows that, I'm not sure that the second does. Ask them, putting it much as I just did about the tax free income and it effectively already being money in a super-sized ISA.

With (the changes on 6th April) it's better to leave it in the pension because the pension has become like a super-ISA for you.

From the two replies it appears that the second FA hasn't yet fully integrated the changes from 6 April into their planning process and the first one has. So the first seems to be doing the better job of being current with the changes to the rules.

Hi jamesd and thank you for your very detailed and helpful answer. To simplify matters I have not quoted it in its entirety above.

I made the second adviser aware of the rule changes and the advice given by the first adviser. He went off and looked into it, then came back and advised that he still thought withdrawing the whole of the lump sum from the pension was the best option. The reason given was that future pensions legislation might change and I might no longer be able to withdraw from the pension free of tax. I'm very confused now about what is best to do.

jamesd

It is reasonable to be concerned about a change in the pension rules but that change is unlikely to happen without notice. I do agree with the second FA to some extent and it's not a bad idea to take out a fair chunk of the money, perhaps one hundred thousand. Not all of it because when it's outside the pension it's subject to potential capital gains tax and any income is taxable. A hundred thousand in just growth investment outside is OK, as is gradually taking out £15k a year to move into an ISA on top of your income need. Maybe as much as £200,000. Not more than that, because why make the income taxable when it doesn't have to be?

Given the better apparent currency of knowledge of the first FA I suggest going with them but telling them that you'd like to reduce pension legislative risk by putting around a hundred thousand outside the pension wrapper now, concentrating on growth investments and limited so that changes to investments are unlikely to exceed the CGT allowance. Also that you want to use 15k a year from the pension pot to go into ISA plus your income need to gradually reduce the legislative risk over time.

The second FA isn't bad, after all it's just what has been standard for years. But moving all of the money outside the pension where growth would be subject to income tax and income taxable instead of tax free until it's been moved into an ISA is not a good move now you have the way to avoid that by leaving it in the pension.

End game here is that eventually the moving of the full S&S ISA allowance will mean nothing is left in the pension and it's all in the S&S ISA. But along the way you'll have kept the income and growth tax free inside the pension instead of lots of it being taxable for many years under the plan of the second FA.

Are there any other differences between the FAs and how you get on with them?

Aged

jamesd wrote: »

It is reasonable to be concerned about a change in the pension rules but that change is unlikely to happen without notice. I do agree with the second FA to some extent and it's not a bad idea to take out a fair chunk of the money, perhaps one hundred thousand. Not all of it because when it's outside the pension it's subject to potential capital gains tax and any income is taxable. A hundred thousand in just growth investment outside is OK, as is gradually taking out £15k a year to move into an ISA on top of your income need. Maybe as much as £200,000. Not more than that, because why make the income taxable when it doesn't have to be?

Does this still apply if I already have a sum in cash (£300K - presently in an NS&I Income Bond but hopefully to be invested so that the capital keeps pace with inflation)?

Given the better apparent currency of knowledge of the first FA I suggest going with them but telling them that you'd like to reduce pension legislative risk by putting around a hundred thousand outside the pension wrapper now, concentrating on growth investments and limited so that changes to investments are unlikely to exceed the CGT allowance. Also that you want to use 15k a year from the pension pot to go into ISA plus your income need to gradually reduce the legislative risk over time.

The second FA isn't bad, after all it's just what has been standard for years. But moving all of the money outside the pension where growth would be subject to income tax and income taxable instead of tax free until it's been moved into an ISA is not a good move now you have the way to avoid that by leaving it in the pension.

End game here is that eventually the moving of the full S&S ISA allowance will mean nothing is left in the pension and it's all in the S&S ISA. But along the way you'll have kept the income and growth tax free inside the pension instead of lots of it being taxable for many years under the plan of the second FA.

Are there any other differences between the FAs and how you get on with them?

I like and get on with both of them but the first one is steering me towards using a Nucleus wrap which makes me very nervous. Charges wise, the second one is the more expensive of the two.