The Final Retirement - Pension Plan instead of Funeral Plan

Khrisjun

Hi,

My mum and dad asked me yesterday what I thought the best way of them setting some money aside for when the inevitable happens and one of them passes away is. They do not want me or my siblings to have to bear the costs associated.

The do not have very much money, dad now struggles to walk - is on disability benefit and my mum is his carer but they think they will be able to set a small amount of money aside each month (id imagine <£50). They do not have any valuable assets etc and do not own any property. Dad has just turned 60, mum is early 50's.

I know you can get funeral plans etc but have not looked extensively into these, they don't seem too keen on just putting the money in another current account and paying into that so i thought one way might be to open a pension (neither have one currently) and contribute to that - I think they can contribute to this and get the 20% added from the Government, then on death it would be paid tax free to the next of kin?

If this is correct, can anyone recommend a low cost provider than would be low cost to shut the SIPP/account upon death?

Or any other options to really look into and recommend?

Thanks,
Khris

archie17

What are their ages

dunstonh

They do not want me or my siblings to have to bear the costs associated.

That is going to happen whatever the case is. i.e. if they pre-pay the funeral then their estate immediately goes down by the amount they have pre-paid. If they dont pre-pay then the bill is paid out of the estate when it happens.

i thought one way might be to open a pension (neither have one currently) and contribute to that - I think they can contribute to this and get the 20% added from the Government, then on death it would be paid tax free to the next of kin?

If they die before 75 then its tax free. If they die after 75 then it is taxable (if the beneficiary takes the money out of the pension).

If this is correct, can anyone recommend a low cost provider than would be low cost to shut the SIPP/account upon death?

Be wary on DIY SIPPs. Many have large menus of charges that may make them appear low cost whilst things are simple but then charge quite large amounts on admin tasks, including death. If the amount is small and you think its a good idea to do this, then a stakeholder pension may be the best option..... if you think this is a good option.

Khrisjun

archie17 wrote: »

What are their ages

My Dad is 60 and mum is 52

Khrisjun

Thanks dunstonh

If they have the money in a pension and die after 75, does the money not become part of the estate and due to such low figures it would be tax free?

It may be that i'm talking about such low monetary value a pension is not the ideal way to store it and i should say a separate current account might be the best option for them.

dunstonh

If they have the money in a pension and die after 75, does the money not become part of the estate and due to such low figures it would be tax free?

Pensions are not part of the estate. They have their own taxation.

zagfles

If they don't earn enough to pay tax then using a SIPP is well worth considering, see https://forums.moneysavingexpert.com/discussion/5477605

But if they claim any means tested benefits it might affect them so be careful. Pension income usually counts as income for means tested benefits. But some disability benefits aren't means tested eg DLA, PIP.

They could contribute/withdraw keeping a low'ish balance, enough to pay funeral costs. Note that as above some SIPPs charge a few hundred to arrange death benefits, but hopefully by then they'd have got several thousand in tax rebates from the SIPP so will be well up!

xylophone

If the specific worry is funeral costs then a funeral plan would seem the logical answer?

http://www.ageuk.org.uk/products/financial-products-and-services/funeral-plan/

Do your parents have any capital they they could use for this purpose?

Or could you and your siblings pay now and have your parents repay you?

http://www.which.co.uk/money/insurance/reviews-ns/funeral-plans/

Mojisola

Funeral plans vary in what they cover - check out the details before deciding.

http://www.which.co.uk/money/insurance/reviews-ns/funeral-plans/the-costs-of-funeral-plans/

A funeral plan can be a good choice if they are on means tested benefits because paying into one isn't counted as deprivation of capital and the capital held in it is ignored when savings limits are assessed.

My parents paid monthly into a joint funeral plan (which would be used for the first of them to die). When that was paid up, they converted that to one name and took out a second one.

Mine were a lot older than your parents. Unless their health problems are likely to reduce their life expectancy, they might be better off keeping money in accessible savings to use to make their lives more comfortable.

Khrisjun

Thanks for all the replies,

I would think their health problems will reduce life expectancy unfortunately.

The amount of money we are talking about is likely small - Definitely less than a few thousand. I was thinking paying into a SIPP would be good because of the tax relief however the costs upon closure might wipe out a good portion of this relief, especially if they only end up putting in 1k or similar. They would not look to draw down any of the money set aside until the inevitable happens so income affecting any benefits wouldn't be a worry.

Ive read up on the tax treatment and i understand if before 75 then it would be tax free if in a pension, if after then it would be at the recipients nominal rate.

I might have another discussion with them to identify what sort of funeral plans they would have, identify rough costs and then we should be able to decide whether some money in a separate bank account, prepaying a funeral plan or potentially paying into a low cost pension might be best.

WillowCat

The major problem with putting the money into a pension is that although pensions not in payment are ignored for means tested benefits while the holder is under state pension age, one they have achieved that age (not far off for your dad) they will be deemed to be in receipt of that income once they do reach state pension age. Although this will not affect DLA or the state pension itself, it would affect any claim for housing benefit, council tax support or pension credit. Although it sounds odd, as far as I understand, it will be taken into account as income even if sitting in the pension regardless of whether the capital value of the pension is over the limit or not.