Death Benefit advice, Defined Contribution Scheme

Aristotle67

My partner passed away two months ago and through an Expression of Wish her retirement account has been bequeathed to me. The total value of the retirement account is around £300,000.

I have to make a decision as to how to take the funds in the account. One option is an annuity, but my understanding is that these offer very poor value.

A second option is flexible cash or income, commonly known as drawdown. This is how my partner was managing her retirement account. The account contains slightly more than it did two years ago, despite her taking an income in the form of lump sum withdrawals amounting to £18,000 p.a.

The third possibility is to take the fund as a lump sum. This will be tax free because of my partner's age on her death.

I had always assumed that drawdown would be the way to go, as it guarantees an income for life as long as there are sufficient funds remaining in the pot. My partner's investments were low risk and would seem to have performed reasonably well, though of course things can change. I thought something similar would be the best choice. I have a major concern with this, however. My partner paid into this retirement account for years, and only enjoyed the benefit of this for three years after she took early retirement. She has bequeathed it to me, but as it is not my retirement account I could not leave it to anyone else. Therefore, should I pass away, whatever is left in the retirement account will not be able to be enjoyed by any other family member. We had no children. That does not sit comfortably with me as she worked hard all her life and if this account were not to be enjoyed by anyone it would be a tragedy.

I am therefore leaning towards taking the pot as a lump sum and then investing it in various ways, perhaps in property, perhaps in stocks, maybe high interest accounts etc. That way the funds will form part of my estate and, if I should pass away, I can leave the estate to my partner's family and her best friend. I promised her my estate would be passed on in this way and no matter what happens in life I will honour this commitment to my deceased partner. 

I have an appointment with the Government's Pensionwise service to discuss the options available; in the meantime I would welcome any thoughts from members of the forum. I hope I am not thinking about this in the wrong way; I have no experience of dealing with pensions. 

af1963

According to this page:

https://www.gov.uk/tax-on-pension-death-benefits

a pension fund which you have inherited CAN be passed on after your own death.

If you turned it into an annuity there would be no fund remaining for anyone to inherit. But if it is still in drawdown, there would.

dunstonh

Sorry for your loss.  Your thread title doesnt match your post.   i.e. DB scheme in title but referencing a DC scheme in the post.

A second option is flexible cash or income, commonly known as drawdown. This is how my partner was managing her retirement account. The account contains slightly more than it did two years ago, despite her taking an income in the form of lump sum withdrawals amounting to £18,000 p.a.

Don't forget the tax status that applies to lump sum also applies to beneficiary drawdown.  And it's never subject to the LTA again.

I am therefore leaning towards taking the pot as a lump sum and then investing it in various ways, perhaps in property, perhaps in stocks, maybe high interest accounts etc. 

You do realise that it is already invested and some of the alternatives you are looking at are not tax efficient and would put you in a worse position than leaving it in beneficiary drawdown.    For example, there would be nothing to be achieved except paying tax if you invested in stocks outside of the tax wrapper compared to investing in stocks inside the pension.

That way the funds will form part of my estate and, if I should pass away, I can leave the estate to my partner's family and her best friend.

And potentially subject to inheritance tax. Wheras the pension would be outside of the estate and can be left to your partners family etc with no tax on it.

I have an appointment with the Government's Pensionwise service to discuss the options available;

Be aware that pensionwise is limited in what it can discuss.  Mainly generic information.  It does not cover commercial options and does not give specific advice.  In my experience, those that saw pensionwise first and made a decision on what they wanted to do based on that end up doing something different when they get regulated advice.    Pensionwise is a good guide but not reliable enough to make decisions on unless you have very small amounts.

 I hope I am not thinking about this in the wrong way; I have no experience of dealing with pensions. 

At the moment, you appear to be confused on death benefits on pensions and the taxation of pensions and alternatives.  That should be the area you should look to read up on.   You are leaning towards taking it out of the pension when you dont need to.

Aristotle67

af1963 said:

According to this page:

https://www.gov.uk/tax-on-pension-death-benefits

a pension fund which you have inherited CAN be passed on after your own death.

If you turned it into an annuity there would be no fund remaining for anyone to inherit. But if it is still in drawdown, there would.

Thank you for that. I had not realised that it could be passed on. That changes things.
When I saw "private pension" I assumed that this did not include a workplace pension but another form of pension. 

Aristotle67

dunstonh said:

Sorry for your loss.  Your thread title doesnt match your post.   i.e. DB scheme in title but referencing a DC scheme in the post.

Thanks, and sorry, an oversight on my part. I thought death benefit was just a general term and the other form was defined benefit. My mistake.

Aristotle67

You do realise that it is already invested and some of the alternatives you are looking at are not tax efficient and would put you in a worse position than leaving it in beneficiary drawdown.    For example, there would be nothing to be achieved except paying tax if you invested in stocks outside of the tax wrapper compared to investing in stocks inside the pension.

I had not appreciated this, no.

At the moment, you appear to be confused on death benefits on pensions and the taxation of pensions and alternatives.  That should be the area you should look to read up on.   You are leaning towards taking it out of the pension when you dont need to.

So glad I posted. Thank you for your advice.

Aristotle67

Perhaps I should have added that I will turn 55 years old this year and am in pretty good health. I have a small final salary pension which I can access when I am 60. I have been earning a living for some time from betting which is not subject to income tax...at present. 

Edited to add: what has scared me is that I have looked at projections for the fund. At low growth rate the fund in 2031 could be worth £96,300. With mid growth rate it could be £155,000. High growth rate might produce £235,000. I will be 64 in 2031 and at low growth rate the fund will be over £200,000 lower than at present. I do not like the thought that the fund could be depleted so much which is also why I was thinking of taking the pot in a lump sum. I have enough savings in that I would not need to touch the lump sum for any withdrawals or investments for around five years so it could sit in an account just in case markets plummet or there are crises to be navigated; and that assumes I make no income from my activities in that five year period. 

I am happy to learn that I have this all wrong, of course; it is quite new for me. 

Albermarle

A few points here 
1) Pension pot projections tend to be overly pessimistic
2) Probably they are taking into account that your partner was taking out £18K pa . Normally for a pot to be sustainable in case you live to a ripe old age , you would normally be taking a smaller % out of the pot each year.
3) You said it was invested in low risk funds . In fact this is not recommended for long term investing as you need some risk to get the growth to sustain the pot as you withdraw from it.

If you take the three things together , this would explain the rather alarming projections .

I think overall you would get some benefit from taking some professional advice from an IFA. Managing a drawdown pot correctly is not easy, if you have no experience of pensions or investing . In the right hands and with a small bit of luck , it could generate an annual income of around £10k to £12K pa and the £300K could still be there when you die , hopefully a long time in the future .

dunstonh

When I saw "private pension" I assumed that this did not include a workplace pension but another form of pension. 

"private pension" is not an official term.  It can mean different things to different people.  Some think of it as being anything other than state pension.  Whilst others think of it as being anything other that state or occupational pensions.   However, modern workplace schemes are not necessarily occupational pensions.  

Edited to add: what has scared me is that I have looked at projections for the fund. At low growth rate the fund in 2031 could be worth £96,300. With mid growth rate it could be £155,000. High growth rate might produce £235,000. I will be 64 in 2031 and at low growth rate the fund will be over £200,000 lower than at present. I do not like the thought that the fund could be depleted so much which is also why I was thinking of taking the pot in a lump sum. I have enough savings in that I would not need to touch the lump sum for any withdrawals or investments for around five years so it could sit in an account just in case markets plummet or there are crises to be navigated; and that assumes I make no income from my activities in that five year period. 

Projections are synthetic and use a range of assumptions.

With projections, you need to know the assumptions which are used.  For example, they factor in inflation at 2.0% (i.e. reduce the return by 2.0% per annum).    The projection rates shown are before charges.  Not after charges.  Despite all factsheets and returns data being after charges.    And they generally use pessimistic rates.  

So, lets say you have a fund that has been growing with an average of 5.5% a year (after charges), your charges are 1% and the inflation rate is 2.0%.

What the projection could show is 2.5% growth before charges.  2.0% is deducted off that for inflation and another 1% for the charges giving a negative projection.  Despite the fact the pension has been growing at 5.5% on average.

It is very common for the low rate and the mid rate to show a loss in value.

Posts on this board suggest that projections are frequently misunderstood by many people.  And I have come across scammers that have intentionally used projections to slag off a pension so they can easily steal the pension money.

Aristotle67

Albermarle said:

A few points here 
1) Pension pot projections tend to be overly pessimistic
2) Probably they are taking into account that your partner was taking out £18K pa . Normally for a pot to be sustainable in case you live to a ripe old age , you would normally be taking a smaller % out of the pot each year.
3) You said it was invested in low risk funds . In fact this is not recommended for long term investing as you need some risk to get the growth to sustain the pot as you withdraw from it.

If you take the three things together , this would explain the rather alarming projections .

I think overall you would get some benefit from taking some professional advice from an IFA. Managing a drawdown pot correctly is not easy, if you have no experience of pensions or investing . In the right hands and with a small bit of luck , it could generate an annual income of around £10k to £12K pa and the £300K could still be there when you die , hopefully a long time in the future .

Thanks, Albemarle.

I did wonder if those low growth projections were in effect "worst case scenario" and were stated just in case, unlikely but not impossible, that they were realised. Then at least it could be said that my partner had been warned.

Low risk funds would have been what my partner wanted; she was as honest, solid and reliable a person as you could ever meet, but was not one of life's risk takers. She would have been more concerned with protecting the amount of the pot rather than taking a little more risk to sustain the growth. She did have a financial adviser engaged to the provider (Prudential) but decided not to continue with the services of the adviser. She would have been content with the investments and probably thought she was paying for the services of the adviser when she did not need this, which may not have been wise. 

I will look into an IFA, as I really am floundering in the dark. Thanks again.

Aristotle67

dunstonh said:

Projections are synthetic and use a range of assumptions.

With projections, you need to know the assumptions which are used.  For example, they factor in inflation at 2.0% (i.e. reduce the return by 2.0% per annum).    The projection rates shown are before charges.  Not after charges.  Despite all factsheets and returns data being after charges.    And they generally use pessimistic rates.  

So, lets say you have a fund that has been growing with an average of 5.5% a year (after charges), your charges are 1% and the inflation rate is 2.0%.

What the projection could show is 2.5% growth before charges.  2.0% is deducted off that for inflation and another 1% for the charges giving a negative projection.  Despite the fact the pension has been growing at 5.5% on average.

It is very common for the low rate and the mid rate to show a loss in value.

Posts on this board suggest that projections are frequently misunderstood by many people.  And I have come across scammers that have intentionally used projections to slag off a pension so they can easily steal the pension money.

Thanks for that explanation, dunstonh. I am grateful for the insight.

It is interesting that no one has suggested taking the pot in one lump sum as the best way forward. I have a good friend of mine who was an IFA but has since retired. He believes that the only pensions worth having are company final salary schemes. He suggested that in many cases taking the lump sum is the best option and that an IFA might try and find something that offered the IFA more commission, such as using it to top up my own pension. His own recommendation is to invest in property in order to preserve its value.

I thought that I would seek the counsel of others, however, as I would prefer to have too much information than too little. I know that this means it could all get confusing, but then again this is so unfamiliar to me as to already be confusing!

Regarding what people recommend, I can see where he is coming from. I am by profession an academic lawyer and used to tell my students that if you ask 10 insurance brokers to recommend you to the lowest quoting provider, I guarantee you will be recommended to 10 different providers. The lowest providers are the ones who will pay the brokers little or no commission; and they are not going to recommend you to one of those.