Defined benefit HELP please

jem1961

Hi, first up sorry if this all sounds stupid but I need your help.
My husband is 45 in October and we have just received his retirement benefits statement from his ex employer. It says he is entitled to a pension of £3411 each year without drawing any lump sum.
He has just been diagnosed with Vascular dementia after suffering 3 mini strokes. His life expectancy is about 5 years. he wants to know if he can withdraw all of his pension pot in one go and roughly how much his CETV might be?. We are waiting for the administrators to write back but they take ages to reply, anyone any ideas please, many thanks in advance Diane.

ischofie1

Sorry to hear such terrible news.

In the circumstances you would almost certainly be advised to transfer out.
Once out he could only access the money before 55 with terminal illness that has a life expectancy of less than 12 months.
Any money left in his pension after his death would be available to yourself/dependants tax free.

With regards to the CETV.
I'm guessing 25 times the pension so may be £90K ish although many factors could change this.

Regards

xylophone

It would appear that your husband's situation does not fit within the "less than twelve months to live" scenario described here

http://www.pensionsandannuities.co.uk/Terminal_Illness_and_Pensions.htm

http://www.pensionsadvisoryservice.org.uk/about-pensions/when-things-change/ill-health

It may be that your husband's scheme will permit his deferred pension to be brought into payment early and unreduced on the grounds of serious ill health.

It may be possible for him to transfer out of the deferred DB scheme into a DC Scheme. This would require advice from an IFA with Pension Transfer Specialist qualifications.

https://www.finalsalarytransfer.com/ may be worth a look for general background

Has your husband consulted his scheme booklet/the scheme web site if there is one?

Presumably he was working until ill health overcame him - is he currently in a pension scheme?

jamesd

Please also read Unfortunate but necessary query that has a similar question. As in that case his situation is one where it will often, even typically, be best to transfer out of the final salary scheme. In this situation you can ignore all of the advice about it almost always being a bad idea because the situation you find yourself in is in the exception area.

However, that depends on the death benefits it provides to a spouse and whether you would still be eligible at the time of death, since he presumably would not be an employee by then.

We don't really know enough to be sure because the rules for defined benefit pensions can differ significantly and the differences matter but it is likely that he should seek the advice of an IFA as soon as practical so that it is possible if appropriate to rapidly do a transfer out of the defined benefit scheme. If he's planning to continue to work the optimal time to transfer may well be shortly before he's unable to continue to do that but the risk is that he might die suddenly, depriving ou of substantial financial protection. However, he'd probably have death in service benefit and maybe cheap life insurance available through work that ignores pre-existing conditions and that could mitigate this risk significantly, allowing him to work closer to the edge of prudence.

One thing you should both know is that the timelines for transfers make death bed transfers almost impossible. Things have to be set in motion and completed before death because if death happens before the transfer completes it'll usually fail and you'll get the defined benefit scheme's probably lower benefits.

jem1961

Thank you for your help everyone but I have just realised I made some mistakes in my question post, sorry I am a bit out of my depth with all that is happening. My husband is 55 in October and the pension was frozen when he left work 10 years ago. he would receive a pension of £3411 if he doesn't draw anything out, but with his life expectancy being so short he thinks we should draw it all and this means transferring it. he was employed by the company for 13 years but he also transferred a £5,000 pension into the scheme from another employer. Again thank you for any advice. Diane

jamesd

jem1961 wrote: »

My husband is 55 in October and the pension was frozen when he left work 10 years ago. he would receive a pension of £3411 if he doesn't draw anything out, but with his life expectancy being so short he thinks we should draw it all and this means transferring it.

NO! Horrendously bad move to take it all out as soon as he can. There are two reasons, income tax and how pension inheritance works for personal pensions (not the defined benefit one). I'll assume that the transfer has already been done.

Income tax first. In a normal personal pension like this one will be after the transfer, 25% of the pension pot value can be taken as a tax free lump sum. The remaining amount is taxable income in the tax year(s) in which it is taken. That might be more than £100,000 of taxable pension pot. Depending on just how high it is he might end up both losing his personal allowance for income tax and paying 40% or 45% income tax on most of the 75%. No sense at all in taking that huge tax bill unless he's going to die around the time he does it and even then it's a really bad move because of the way pension inheritance works. At a minimum he should be doing things like taking some of the taxable 75% in several different tax years so he doesn't lose his personal allowance and maybe most of it is taxed at 0% and 20%.

But it's even worse. The rules for pension inheritance after death before age 75 are easy: the named beneficiary gets the whole pension pot as a tax free lump sum. So you can get it all with no tax at all, instead of lots of tax.

So what he can do to maximise this is take the 25% tax free lump sum and only take part of the 75% that is taxable. Then after death, you or whoever else he names (maybe a trust for children?) can get the remainder tax free.

Before that happens his doctors might reach the point where they tell him that they are willing to say that he has a life expectancy of less than a year. At which point he can take out the remainder of the 75% as a tax free "serious ill health lump sum".

So his choice is a large tax bill or no tax at all. Take no tax unless he really needs the money very urgently to do something like pay for medical treatment that might save his life. Even then, borrowing may well be cheaper, then repaying the borrowing from the tax free after death payment. Or of course he might want to spend it while he can, in which case once we know the amounts we can discus a plan to reduce ta but since you'll need an IFA anyway and that is a core part of what IFAs do, the IFA can plan for this.

The sort of borrowing that can make sense in this sort of situation can be equity release if you own your own home. He's too young for that to be a great deal in amount borrowed. But that doesn't matter because all he'd be doing is using equity release to delay taking the pension money until after death or a year to live, then taking the money out tax free. At which point he uses it to repay the equity release borrowing, having saved a lot of income tax but still having had the money to spend.

jamesd

Do try not to worry about all of the learning, you do have time to do it and get the professional IFA advice you'll need to have to get this done. There's no instant urgency to it, unlike the case where someone is already in intensive care and only days away from the end, when things really need to be done very fast.

jem1961

Thank you all

jamesd

A bit more on this. If he was to take the lump sum himself, even tax free as a serious ill health lump sum, that money would become part of his estate for inheritance tax. Pension pot money is not part of the estate, and also not governed by the contents of a will. So depending on his other assets, he might end up leaving a large inheritance tax bill if he takes it. If that inheritance tax issue is around then it may be best to leave much of it in the pension until death. Again, borrowing can be helpful for this sort of thing.

Also, should his doctors be willing to say that he has a life expectancy of a year or less and he recovers and lives to a ripe old age after taking it, he doesn't have to repay the serious ill health lump sum or pay any income tax on it.

Also a little background on why I wrote that he can take the 75% as a serious ill health lump sum even after taking the 25% tax free. That used to be impossible once the 25% tax free had been taken but the rules changed this year, as described in Changes to serious ill health pension freedoms welcomed.

A bit more to add to this later about making contributions to a pension for him, something else that he should continue to do.

BobQ

James,

" I'll assume that the transfer has already been done."

I do not see anywhere that the OP's husband has transferred the frozen DB pension anywhere, just awaiting a CETV

jamesd

Right, it hasn't been done. But it can't all be taken while it's in the current defined benefit scheme so it's the situation after a transfer that will be relevant.