Inherited Pension Advice

MissRed1974

I am seeking some advice on behalf of my Mum. My Dad has recently died aged 65 and my Mum has inherited his Flexible Retirement Plan Income Drawdown with Prudential. My Dad had taken early retirement and had been taking drawdowns for a number of years. The total value of the plan is now £377,649. My Mum is aged 72 and has been advised that as my Dad was under 75 when he died the following options are available:-
(1) Lump sum - the total value of plan with no tax deduction;
(2) Continuing in FRP income drawdown - the income payments taken will not be subject to income tax;
(3) Annuity purchase - the annuity payments will not be subjected to income tax (Annuity option is only available if bought with another provider)
My Mum does not have a mortgage the house is paid in full and she has a yearly state pension of £8,840. We have calculated her yearly household bills to be £10,054.
We are struggling to know whether she should take the full amount or to continue with a drawdown plan. She would like to have at least part of a lump sum as she only has a small amount in savings and would like to have a family holiday and update some house furniture etc.
Any advice or observations would be greatly appreciated. Many thanks!

Marcon

MissRed1974 said:

I am seeking some advice on behalf of my Mum. My Dad has recently died aged 65 and my Mum has inherited his Flexible Retirement Plan Income Drawdown with Prudential. My Dad had taken early retirement and had been taking drawdowns for a number of years. The total value of the plan is now £377,649. My Mum is aged 72 and has been advised that as my Dad was under 75 when he died the following options are available:-
(1) Lump sum - the total value of plan with no tax deduction;
(2) Continuing in FRP income drawdown - the income payments taken will not be subject to income tax;
(3) Annuity purchase - the annuity payments will not be subjected to income tax (Annuity option is only available if bought with another provider)
My Mum does not have a mortgage the house is paid in full and she has a yearly state pension of £8,840. We have calculated her yearly household bills to be £10,054.
We are struggling to know whether she should take the full amount or to continue with a drawdown plan. She would like to have at least part of a lump sum as she only has a small amount in savings and would like to have a family holiday and update some house furniture etc.
Any advice or observations would be greatly appreciated. Many thanks!

I'm sorry your mum has lost her husband, and you your dad, when he was only 65.

You say your mum (who seems to live very modestly) would like a lump sum. Is there anything to stop her taking larger drawdowns (ie bigger lumps of cash) at least for the next year or so, to enable her to achieve her immediate objectives but still leave 'plenty in the pot' for later? Flexible drawdown is normally just that: capable of being varied from one withdrawal to the next.

MissRed1974

Thank you so much for your response. Just to clarify the cost of living figures I quoted are just to cover all household bills. My Mum is a very young 72 and I would not say she lives too modestly she enjoys an active lifestyle days and meals out and holidays etc. Can it be decided on a yearly basis how much money she could drawdown from the plan? I am unsure what kind of figures the money invested would make and if this is likely to be better invested elsewhere? This is obviously money that needs to last the rest of her lifetime so would not want to take too much risk.

Marcon

MissRed1974 said:

Thank you so much for your response. Just to clarify the cost of living figures I quoted are just to cover all household bills. My Mum is a very young 72 and I would not say she lives too modestly she enjoys an active lifestyle days and meals out and holidays etc. Can it be decided on a yearly basis how much money she could drawdown from the plan? I am unsure what kind of figures the money invested would make and if this is likely to be better invested elsewhere? This is obviously money that needs to last the rest of her lifetime so would not want to take too much risk.

Talk to the Pru to be sure exactly what constraints there are (if any), but normally it's entirely up to the member - or in this case the person who has inherited the 'pot' - to decide what they would like to withdraw and when.

This is a pretty hefty inheritance (and I'm glad she has a good life which will be enhanced by it), so maybe paying for some independent financial advice - please let me stress 'independent', which means the adviser can look at the whole market, as opposed to being 'tied' to just the produce range of their employer - might be a good way to set her mind at rest? It may be as simple as changing some of the funds in which the pension is currently invested, as opposed to moving to a new provider completely; or possibly using some of the money to buy an annuity (posh word for pension!) to top up her state pension, but also allow flexibility in accessing the rest of the cash.

DRS1

or possibly using some of the money to buy an annuity (posh word for pension!) to top up her state pension, but also allow flexibility in accessing the rest of the cash.

Just fleshing that thought out a little she could look at an annuity of say £4000 a year to have enough (when added to the SPA) to cover the household bills with a bit of a buffer.  Inflation link it so it does not get eroded too much.  Then what is left is just money to play with give away to family go on world cruises etc.

It would be worthwhile knowing how the pension is invested and how hands on your father was with investing it compared to how hands on your mother would want to be.

SVaz

£10k a year seems quite low for basic living expenses, I take it that days out/meals out/ holidays haven’t been accounted for?

She could take £12000 yearly out of the pension and never run out of money with it invested fairly cautiously .   

It might already be set up with income funds that pay enough dividends to give her an income she’d be happy with.   The Pru should give her that information if she asks. 

If she wants a Lump sum out then she will probably need to sell some investments,  if she just tells them she wants X amount they will decide what to sell. 

MissRed1974

Thanks for all your replies. The £10K a year is literally to cover all household bills. The cost of food and any other living expenses is not included i.e. holidays, days outs, eating out etc. My Dad was quite hands on with his investments Mum was saying he was always commenting when his pension pot went up or down. My Mum would not be hands on at all. She basically just wants to have enough to have nice holidays with her family and hopefully not run out of money. Me and my sibling are encouraging her to live comfortably and not be concerned about leaving any money to us in terms of inheritance from the pension fund. What kind of conservative return would you expect the pension to make per year? Obviously I am aware that investment figures are not guaranteed and can go down as well as up.

QrizB

Judging by the figures here, she could probably buy an RPI-linked annuity worth £18000 a year and still have £80-100k left to splurge on holidays, home improvements, furnishings etc.

https://www.hl.co.uk/retirement/annuities/best-buy-rates

I'm not saying that's necessarily her best option, but once set up it's entirely hands-off and she'd be comfortable for as long as she needs it. And it gives you a benchmark when comparing other options.

Marcon

MissRed1974 said:

Thanks for all your replies. The £10K a year is literally to cover all household bills. The cost of food and any other living expenses is not included i.e. holidays, days outs, eating out etc. My Dad was quite hands on with his investments Mum was saying he was always commenting when his pension pot went up or down. My Mum would not be hands on at all. She basically just wants to have enough to have nice holidays with her family and hopefully not run out of money. Me and my sibling are encouraging her to live comfortably and not be concerned about leaving any money to us in terms of inheritance from the pension fund. What kind of conservative return would you expect the pension to make per year? Obviously I am aware that investment figures are not guaranteed and can go down as well as up.

It's not the pension per se which makes a return - it's the underlying funds in which the money is invested. Any idea what the current funds are - should be information which is readily available either on the website (if your dad was managing online and your mum has access too), on a recent pension statement he might have received before he died, or just ask the Pru to send you a statement giving a breakdown.

MissRed1974

We haven’t got access to his online account but in notifying the Prudential of his death they have sent Mum a statement advising the remaining funds are £377,649. I can see on a previous statement the fund name was Prudential Prufund Risk Managed 4 Fund Pen Ser A.