Small DC pot in retirement

etienneg

Recently I was talking to a colleague who retired just over a year ago at age 65. His main income is from two DB pensions and state pension and he pays BR tax. His wife has a much smaller DB pension and state pension. I don't know the figures but he says they are more than comfortable and can easily afford holidays, replacing cars, etc. from their combined income without dipping into savings. They own their house outright.

He also has a small DC pot from the last years of his employment (around £27,000) which is in a Standard Life Group Flexible Retirement Plan, invested in the Standard Life At Ret (Passive Plus Universal) fund. Since his retirement its value has increased only marginally (like cash in a savings account). The total annual fund charge is 1.03%.

If he were to die, the widow's pension from his DB pensions would be 50%, so his widow would face a large drop in household income. Clearly the earlier his death, the greater the impact. So, his idea is to leave the DC pot in case of this eventuality, when his widow would be able to take the whole pot tax free (if he died under age 75). He might also add £2880pa (£3600 gross) to supplement this pot and benefit from the tax rebate. Otherwise, there are two children to inherit.

How should this be invested? The timescale is unknown, but to benefit from withdrawal tax free we think his widow would need to take the money out within a year of his death (so a problem if there had been a major downturn around the time of death). He was considering a moderate fund such as VLS60 until he discovered that Standard Life don't offer this. What they describe as SL Vanguard 60:40 is a mix of UK and foreign equity, not 60% mixed equity with 40% bonds.

The alternative would be transfer to a SIPP where standard funds such as VLS60 are available. But would this be better than something else available within the SL plan - and is such an investment sensible anyway, or what should he be looking for? Hmmm! Neither of us have ever thought about such things before, so comments and suggestions are welcome!

Brynsam

etienneg wrote: »

The timescale is unknown, but to benefit from withdrawal tax free we think his widow would need to take the money out within a year of his death (so a problem if there had been a major downturn around the time of death).

No such time limit - the funds are tax free if he dies before age 75, whether taken as a lump sum, annuity or drawdown.

etienneg

Brynsam,

Thanks for the reply. However, what you say isn't in accord with official government advice here:
https://www.gov.uk/tax-on-pension-death-benefits

After saying most lump sums pay no tax, it goes on as follows:

"You pay tax if the pot’s owner was under 75, and it’s more than 2 years after the provider is told of their death when you get either:

an annuity or drawdown fund from an ‘untouched’ pot (the person who died didn’t take any money from it)
most types of lump sum from defined contribution or defined benefit pots
In both cases, the provider will deduct Income Tax before you’re paid."

From memory, I said 1 year, whereas it appears to be 2 years - sorry. At least this would give a bit longer for recovery of investment after a severe downturn.

Or do you have a different source for what you said?

Albermarle

Normally with a company like SL, there will be a restricted number of funds available . The actual number will depend exactly on the pension you have with them, and could be between a handful up to 200. Probably in there somewhere will be a fund very similar to the Vanguard 60:40 ( equities: bonds). It might be called something like Passive Plus 3/medium risk.
If you change to a SIPP you will have access to more funds/options but probably you will never use 99% of them and in fact probably best not to get too adventurous unless you really know what you are doing. Although its unlikely the charges would be significantly different but would be worth checking this anyway
If the charges are simlar and if you can find the right sort of fund with the current pension then probably not worth changing.

kidmugsy

etienneg wrote: »

Or do you have a different source for what you said?

I hope he does; that link is so badly written that it's not clear to me what it means. It might mean that if you want eventually to withdraw money from the "pot" tax-free you must have claimed the pot within two years of the death's being notified to the pension provider. That is, it's reported, the pot is transferred to your name, and you can then draw the money out tax-free whenever you like. Or it might mean something else entirely.

Is there nobody left working for HMG who can write simple, clear, unambiguous English? Pensions are such a minefield that using good writers is terribly important.

Brynsam

etienneg wrote: »

Brynsam,

Thanks for the reply. However, what you say isn't in accord with official government advice here:
https://www.gov.uk/tax-on-pension-death-benefits

After saying most lump sums pay no tax, it goes on as follows:

"You pay tax if the pot’s owner was under 75, and it’s more than 2 years after the provider is told of their death when you get either:

an annuity or drawdown fund from an ‘untouched’ pot (the person who died didn’t take any money from it)
most types of lump sum from defined contribution or defined benefit pots
In both cases, the provider will deduct Income Tax before you’re paid."

From memory, I said 1 year, whereas it appears to be 2 years - sorry. At least this would give a bit longer for recovery of investment after a severe downturn.

Or do you have a different source for what you said?

You have two years from the death (of an under-75) to either withdraw the money as a tax free lump sum, purchase an annuity or move the funds to a 'pot' in your name. The problem with tax only arises where the provider isn't told of the death for over two years OR the beneficiary/ies take no action at all.

etienneg

Thanks again, Brynsam, for your reply. That seems to make sense. So, if my colleague died in the next 8.75 years (before he reaches 75), his widow would either pay income tax on an annuity or drawdown from a pot in her name, or would need to take the whole pot as a tax-free lump sum within 2 years of his death. That's why we think the investment should be sufficiently non-volatile to recover from any likely downturn in less than 2 years.

I've seen volatility described as a percentage (it could lose 30% or 50% or whatever of its value). But what matters here is not how much it might lose, but how quickly it is likely to recover. Can anyone tell me if these factors are related, or how recovery time is described in fund fact sheets?