Death Benefit advice, Defined Contribution Scheme

Albermarle

Aristotle67 said:

Albermarle said:

You would solve the issues you are concerned about and not bring new problems, by transferring it to another more flexible pension. 
No FA fee . Full control of the investments . No issues with Capital Gains or dividend tax ( which you will have when investing such a large sum of money outside a pensions ( apart from paying more tax it is a lot of admin ) . Pension pot remains outside your estate for inheritance tax purposes but can still be left to chosen beneficiaries.

Thanks, Albemarle. I have been thinking about that last part and, despite what I wrote initially about always wanting to pass whatever remains on to beneficiaries, that is now not a consideration; and this as a result of a discussion with those who would have been the beneficiaries. They want me to do what is best for me, as that is what my partner would have wanted. I am also not worried about inheritance tax if the funds were passed within the estate, e.g. if I took a lump sum.

Does that change anything in terms of options? 

If it is invested well in a new pension, and markets are kind, and you do not take out excessive amounts , there could well be a decent pot still left when you died.

Although it seems at first a small point , if the money is in a pension , it is much easier to manage . Outside a pension you have to keep detailed records of any buying or selling of funds and any income from dividends , so it can all be reported correctly to HMRC. It's a headache if you are not familiar with this sort of thing. ( I have avoided it by keeping all investments within a pension or a S&S ISA) Almost certainly you will be liable for some tax,  and it could be quite a lot if you do not make efforts to minimise it by strategic selling and rebuying of investments .
When the investments are in a pension you have zero worry on this front.

Aristotle67

FIREmenow said:

I am so sorry for your loss and can't imagine how hard it is to try to deal with this at the moment. I can understand your wish to not waste your partner's hard-earned pension but you could accidentally make quite a costly decision if you act quickly whilst grief has a tight grip.

Forumites, am I right in thinking there will be a huge tax bill if the OP were to completely empty the pension in one go? If so, could someone please quantify this for the OP as I don't want to miscalculate it myself.  It might help to see actual figures.

I know the answer to this one myself. There will be no tax bill because the pension is an inherited pension and thus the lump sum is tax free if taken in one go. Also, regular lump sum withdrawals from, and growth into, the pension pot are also tax free.

Hang on a minute.............

Aristotle67

NannaH said:

  For goodness sake don’t take the cash lump sum and stick it into an investment account, you will be taxed on growth or dividends and then on any income! Plus the hassle of yearly self assessment. 

I was actually thinking of just putting it into my current account or a tax free savings account and leaving it there. It won't grow, it won't gain any interest, but it will be there for me in its entirety if I should ever need it. Might not need it for a number of years. That would not require self-assessment, would it?

Aristotle67

Albermarle said:

If it is invested well in a new pension, and markets are kind, and you do not take out excessive amounts , there could well be a decent pot still left when you died.

"and markets are kind". That worries me. 

MallyGirl

Aristotle67 said:

NannaH said:

  For goodness sake don’t take the cash lump sum and stick it into an investment account, you will be taxed on growth or dividends and then on any income! Plus the hassle of yearly self assessment. 

I was actually thinking of just putting it into my current account or a tax free savings account and leaving it there. It won't grow, it won't gain any interest, but it will be there for me in its entirety if I should ever need it. Might not need it for a number of years. That would not require self-assessment, would it?

that wouldn't require self assessment but it would be devalued by inflation which is not in a good place right now.
Tax free savings account = ISA and that is limited to £20k deposit per year. Where are you going to put the rest of the £300k pot?
You could put £50k in premium bonds but that still leaves £230k to house, and protection in a bank is limited to £85k so you would have to spread it around.

FIREmenow

Aristotle67 said:

FIREmenow said:

I am so sorry for your loss and can't imagine how hard it is to try to deal with this at the moment. I can understand your wish to not waste your partner's hard-earned pension but you could accidentally make quite a costly decision if you act quickly whilst grief has a tight grip.

Forumites, am I right in thinking there will be a huge tax bill if the OP were to completely empty the pension in one go? If so, could someone please quantify this for the OP as I don't want to miscalculate it myself.  It might help to see actual figures.

I know the answer to this one myself. There will be no tax bill because the pension is an inherited pension and thus the lump sum is tax free if taken in one go. Also, regular lump sum withdrawals from, and growth into, the pension pot are also tax free.

Hang on a minute.............

Yes,  it could go on being tax free forever,  but if you put it in a current account/savings account you can only earn interest of £1000 without paying tax. The current inflation rates mean you are pretty much taxing yourself at least 5% this year and maybe for a few more (way more than the FA wanted) as inflation eats away your pot, and finally it will be taxed again when you die. 

If you're determined not to invest it,  have you thought about transferring it to a DIY pension platform for drawdown and leaving it in cash? Then you can drawdown as you need it as if it's a current account,  and if at some point you decide you want to get back into the stock market,  or have a beneficiary you want to name, or find an IFA you trust,  or any other change in circumstances,  your pension wrapper and your rights are intact. 

doodling

Hi,

It is not clear whether you are considering all the risks:

1. Investment risk - yes, you seem to be focussed on this.
2. Inflation risk - no, you're completely ignoring this and assuming that if something is in a bank account then it will keep its value.  It is a long time (several centuries) since inflation has been near zero!
3. Taxation risk - you're sort of considering this, but once you've taken something out of a pension then you can't put it back in unless you're working.  If you decide that actually you want to earn interest because 20% inflation is destroying the value of your money then suddenly you have a big tax bill to consider if it isn't in a pension.  You can hold cash in a pension if you really want to.
4. Personal finance risk - money in a pension is unavailable to your creditors should you be in debt or go bankrupt.  Similarly, depending on age, it doesn't count towards any limits associated with claiming benefits.  This might not be an issue for you but it might be for some.
5. Longevity risk - will you live long enough to enjoy it?  If you think you're going to die next week then the George Best approach might be the answer.  Equally if you're planning on living to 105 then you need to take that into account in your planning (think about (2) above, even at 2% over 40 years).

My suggestion is that you transfer it to a suitable SIPP and give yourself some time to think about what your plans are.

I suspect that a similar investment approach to that taken by your partner might be appropriate in the longer term, but there is nothing to stop you having the whole lot sat in cash a SIPP if you want to (noting that in a year it will probably be worth 93% of its current value due to inflation).

Albermarle

Aristotle67 said:

Albermarle said:

If it is invested well in a new pension, and markets are kind, and you do not take out excessive amounts , there could well be a decent pot still left when you died.

"and markets are kind". That worries me. 

The  point is that if markets are kind , and you do not take out excessive money out every year, the pot might never shrink. It might not happen but it is a  possibility to be aware of 
Otherwise as you take money out then the pot will slowly go down of course .

As mentioned now by other posters , you can transfer to a new pension and not actually invest it , and hold it in cash . 
However I think you can see that almost everybody thinks keeping the money within a pension tax shelter is a good idea.

Aristotle67

FIREmenow said:

If you're determined not to invest it,  have you thought about transferring it to a DIY pension platform for drawdown and leaving it in cash? Then you can drawdown as you need it as if it's a current account,  and if at some point you decide you want to get back into the stock market,  or have a beneficiary you want to name, or find an IFA you trust,  or any other change in circumstances,  your pension wrapper and your rights are intact. 

That is certainly an option, FIREmenow. Thank you.

Aristotle67

doodling said:

Hi,

It is not clear whether you are considering all the risks:

1. Investment risk - yes, you seem to be focussed on this.
2. Inflation risk - no, you're completely ignoring this and assuming that if something is in a bank account then it will keep its value.  It is a long time (several centuries) since inflation has been near zero!
3. Taxation risk - you're sort of considering this, but once you've taken something out of a pension then you can't put it back in unless you're working.  If you decide that actually you want to earn interest because 20% inflation is destroying the value of your money then suddenly you have a big tax bill to consider if it isn't in a pension.  You can hold cash in a pension if you really want to.
4. Personal finance risk - money in a pension is unavailable to your creditors should you be in debt or go bankrupt.  Similarly, depending on age, it doesn't count towards any limits associated with claiming benefits.  This might not be an issue for you but it might be for some.
5. Longevity risk - will you live long enough to enjoy it?  If you think you're going to die next week then the George Best approach might be the answer.  Equally if you're planning on living to 105 then you need to take that into account in your planning (think about (2) above, even at 2% over 40 years).

My suggestion is that you transfer it to a suitable SIPP and give yourself some time to think about what your plans are.

I suspect that a similar investment approach to that taken by your partner might be appropriate in the longer term, but there is nothing to stop you having the whole lot sat in cash a SIPP if you want to (noting that in a year it will probably be worth 93% of its current value due to inflation).

1. I am focussed on this and even I am starting to see that maybe I am doing so too much. I keep thinking that with rising energy prices, rising interest rates, rising inflation, Putin massing near Ukraine, that maybe we are heading for a mighty crash and that World War Three might be about to break out.

What I do appreciate is that when markets crash, it is only a problem if you have to sell. If you don't have to, then you can wait for a recovery. However, would I be right in thinking then when you take regular lump sum withdrawals from a drawdown that units are sold in order to pay for this with the outcome that you end up with less units? If the units are worth much more than they were, then the value of your pot can still be high despite the decreased number of units; but if they are not, the value of your plot plummets.

2. Yes, you are right. I am ignoring this, and am obviously most unwise to be doing so.

3. I had not given enough consideration to tax, clearly. I have rather got out of the habit of this. For almost the last 20 years I have been a professional sports trader (or gambler, if you prefer) meaning that I do not pay tax on my income. Yet, believe it or not, I do not want the funds to gamble with, I am doing okay without these. And you might think that of all people I would be in favour of a portfolio with more risk, but not so. There are certain things I would never gamble with, and this pension pot is one. When I get involved it is because I understand what I am playing on and think I have identified an edge. You will never find me down a casino playing roulette or blackjack. Live poker is a different matter, and I focus on this and certain sports where I have a sixth sense and tremendous instinct for identifying value. Conversely, I do not understand the stock market. 

4. None of these points will ever be an issue for me.

5. I confess I do not want to live to a ripe old age to end up in a care home, suffering with dementia, and paying £700 - £1000 (then factor in inflation!!) a week for care. I have seen first hand what that does to people. If I do end up in residential care, the house would be sold to cover that. So for me point 5 is not a consideration.

Thank you so much for this, doodling. Much to be considered there.