planning for death is expensive!

mrklaw

My basic plan looks fine - stress tested for 2% real returns and monte carlo etc. 

But if one of us dies (specifically me as the most impactful) - my DB gets cut in half, and we lose one state pension (after 67 - prior to that we have life insurance still in place). Before, almost all funds were covered by guaranteed income. But with I go first, we need around 20k a year, and still 5k after 75 (reducing income 25%). Less if my wife goes first as my DB remains 100% so all plans are based on me first.

Putting a fund in place to cover the worst case - eg me dying at 66/67 - we estimate we should reserve a pot of around £135k at retirement as a ‘survivorship fund’ - basically self insuring and that fund cannot be touched for normal income. at 75 when income needs drop, we coudl free up some of that in a controlled way for gifting. 

Previous plan: around £250k would cover our needs (mainly during early retirement)

Plan including a survivorship fund : £385k. 135k more, and almost 50% larger starting pot size. This wasn’t easy to surface in Voyant without lots of moving mortality dates and trying to analyse the graphs. a cashflow year by year helped a lot with that.

Couple of questions:

1) how are you stress testing for early death in a couple, and factoring that into your plan

2) is this self insurance the best option? an annuity at retirement doesn’t make sense as we have funds needed if we’re both healthy. An annuity on death could make sense but we need funds for that which this would provide. Are there alternative strategies to cover this?

hugheskevi

1) how are you stress testing for early death in a couple, and factoring that into your plan

Both myself and my wife will take our DB pension early with actuarial reduction. This does not affect survivor pensions, so the survivor pension as a percentage of pension in payment will be much higher than normal.

We also have DC pensions that would be inherited tax free in the event of death under 75, so the survivor would have a tax benefit - DC pension is a great complement to DB pension to cover early death, as the net value of the DC pension actually increases on death under 75 and only has to cover one person, whereas the value of DB pension collapses on death.

For very early death, in-service enhancements would apply. For death after leaving but within 5 years of taking pension, death lump sum would be paid equal to 5 years of pension payments. So there are various options that improve outcomes for death before 75.

An additional irritation is the greater exposure to higher rate tax following death, with income concentrated against a single set of allowances rather than two.

I monitor our post SPA income on a gross and net basis, and by dual and survivor income, in our spreadsheets. This only looks at State and DB pension, with no enhancements, ie, a worst-case scenario.This is useful to try to smooth incomes as far as possible both before and after death, maybe with a slightly delayed commencement of DB or State Pension. Income equivalisation scales typically suggest a single person needs about 60-65% of the income of a couple to achieve a comparable living standard.

The DB scheme might have an option to increase survivor benefits, sometimes called 'Allocation'

mrklaw

you’re very lucky to have 100% survivor DB pensions - both of you! that makes planning much simpler with only state pension loss?

SVaz

By a complete fluke, we renewed our life cover at 50, which takes us to 75 - that would cover 10+ years of ‘lost’ joint income for either of us.
My Wife would get 50% of my military pension and obviously lose my SP, after 75 then general spending will go down, I doubt one of us would do much travelling or eating out alone. There will be savings ( my Wife is getting all her Sipp out tax free and into ISAs) and my Sipp.

hugheskevi

https://forums.moneysavingexpert.com/discussion/comment/81960721#Comment_81960721

They are not 100% survivor pension, sadly. The table in my post above shows that if I die, our gross combined income of £90,729 falls to £60,187 for my wife on her own, so a loss of over £30,000 p/a which is far higher than loss of State Pension alone.

Our DB pensions pay 37.5% of pension due at Normal Pension age. However, by taking pensions early, various different chunks of our DB pension are reduced by 19.4%, 36.8% and 46.4%. As the survivor pensions are unchanged by taking pension early, they become 47%, 59% and 70% of pension in payment, respectively.

Silvertabby

Don't assume you'll need less after 75 - you may have to cover the costs of cleaning, gardening, odd jobs, etc that you now do yourselves, but may not be able to do in the future.

LHW99

Does your wife have any form of pension apart from the SP?

If not, even if she isn't earning, you / she can invest £2880 pa (until she is 75), which would be topped up by the Government to £3600.

We are lucky that we both have small DB pensions, plus full SP and both have ISAs & SIPPs in our own names. They are not equal amounts, but should enable either of us to end up with around 2/3 current pension income at first death, plus all savings and half the property value.

SVaz

I’ve factored in £100 a week of ‘extra’ spending to cover any and all household jobs plus a £20k new roof / whatever fund should it be needed. New windows and doors are being done this year before I retire in 18 months and I’ve got a couple of radiators stored in the garage to get around to fitting at some point.
Major roof work and all new fascias/soffits and guttering were done a few months ago. Kitchen and bathroom are not yet 5 years old.
I’ll be installing a new boiler next year while I can still get one at Trade cost and am still Gas safe registered.
Thankfully we have younger relatives in the plumbing / electrical and roofing trades!

mrklaw

https://forums.moneysavingexpert.com/discussion/comment/81960795#Comment_81960795

no DB. there is a small SIPP which we’re pushing into now to take advantage of her personal allowance. But that is planned to be spent down in early retirement and will then be replaced by state pension for her. So her ‘income’ is almost 12.5k throughout retirement effectively

OldScientist

1) how are you stress testing for early death in a couple, and factoring that into your plan

For the period before my OH receives their SP, there are two term life insurance policies on my life, one level and one decreasing - the latter helps provide inflation protection to the income derived from the payout, but more cheaply than doing it all with a single level policy.

Post-SP, my OH will have sufficient income from a) half my DB pension, SP, and portfolio withdrawals to maintain their lifestyle.

Bostonerimus1

What I worry about is the cost of care as I age. If you are alone and aging there might well be a time when doing the basic things becomes difficult. Many people won't be able to rely on family to help or might just not want to be a burden. Care is expensive and the unknown length of time it might be necessary makes it very hard to plan for. Without the availability of long term care insurance in the UK I don't really have many good suggestions other than plan to have a good excess of funds to spend on care or buy immediate needs annuities etc…or maybe give it away early and become a pauper.