Basic Question about pensions and death.

ukbondraider

As I understand it, with pensions all the money you save can only go to your spouse when you die. If however, your spouse dies before you or dies shortly after you (before using the money) then the money from your pension disappears i.e your children do not inherit it.

Is this correct?

If so why does anyone bother with pensions? You cant pass your money on when you pass away.

Surely saving and other investments are a better way as it can be passed on.

If I am correct about pensions I must be missing something about them as to put away cash only for the government to take it when you die is crazy.

HeadInSand_2

...also, what if you're single, childless and in your 30s? Do the Govt. just absorb it in the event of death?

CLAPTON

because some people live to be 90 and get an inflation linked pension for all that time.

so if, in todays terms you want a pension of 20k per annum at say 65 years and you want it inflation linked, then you need a pension pot of about 600,000
so if you save that up over 30 years you need to start saving at about 20k per annum

are you saving 20k per annum?

tanith

I didn't look upon my pension as being something for my kids to ineherit but something I and my employer paid into to sustain me and supplement my Old Age Pension when I retire. I took the attitude that some folks have a short retirement :eek: and the government win, and some folks live for years and years and years..:T :T :T and the government loses.. I hope I am of the later variety... my OH will inherit part of my pension as long as he survives me and vice-versa..

EdInvestor

ukbondraider wrote: »

As I understand it, with pensions all the money you save can only go to your spouse when you die. If however, your spouse dies before you or dies shortly after you (before using the money) then the money from your pension disappears i.e your children do not inherit it.

Pensions are outside your estate and held in trust for your nominated beneficiaries.If you died and the money was paid to your spouse or other dependants it would then be part of their estate.This applies to unvested pensions (ie where you have not yet retired.)

Once you have retired the position is different. If you are in income drawdown after retirement, your spouse/dependants can inherit 65% of your pension fund if you die before age 70.After that, the fund will go to your spouse (but not in cash).When s/he dies, generally the Government will take the rest.

dunstonh

As I understand it, with pensions all the money you save can only go to your spouse when you die. If however, your spouse dies before you or dies shortly after you (before using the money) then the money from your pension disappears i.e your children do not inherit it.

Is this correct?

Personal pensions (those with a fund value) pay to the nominated beneficiary if you die before crystallisation. It can be spouse, neighbour or whoever. However, the trustees of the scheme can overrule your nomination if it is deemed to be frivolous

Surely saving and other investments are a better way as it can be passed on.

Only if you make the incorrect assumptions. For death before retirement, pensions beat everything else as the fund value is paid out (including tax relief and tax free growth) with no liaibility to IHT. Savings/investments would be potentially subject to IHT.

ukbondraider

EdInvestor wrote: »

Once you have retired the position is different. If you are in income drawdown after retirement, your spouse/dependants can inherit 65% of your pension fund if you die before age 70.After that, the fund will go to your spouse (but not in cash).When s/he dies, generally the Government will take the rest.

So lets say your retirement pot is £100K and you take out 25% i.e 25K when you retire. Doesnt this mean that 75% of your pension can be effectively taken by the government.

Wouldnt you rather have say £85K as a pension pot in your ISA and know that you can put the whole amount to good use regardless what happens.

ukbondraider

dunstonh wrote: »

Only if you make the incorrect assumptions. For death before retirement, pensions beat everything else as the fund value is paid out (including tax relief and tax free growth) with no liaibility to IHT. Savings/investments would be potentially subject to IHT.

Ok I understand the tax benefit and the fact that a pension may accumlate more by the time you retire. However wouldnt you rather take a lower final pot as mentioned in my previous post knowing that you will determine how the whole amount is used and when it is used.

As for Savings and Investments being potentially subject to IHT, you are right. Note the word "potential" in your statement.

Basically from my point of view a pension should only be had if your employers contributes to it. Otherwise savings and investments e.g a mortgage free house is surely a much better choice.

dunstonh

So lets say your retirement pot is £100K and you take out 25% i.e 25K when you retire. Doesnt this mean that 75% of your pension can be effectively taken by the government.

No. The Govt doesnt get the money.

if annuity, your annuity will follow your instructions. So, if you bought a joint one it will continue until second death. If you bought capital buy back then your beneficiary will get a pro rata refund. If you are using drawdown, the drawdown can continue or be passed onto a beneficiary with a tax charge.

Retired_I.F.A.

Basically from my point of view a pension should only be had if your employers contributes to it. Otherwise savings and investments e.g a mortgage free house is surely a much better choice.

A pension is an investment with tax advantages like no other thats why no other investment even comes close. Thats a historical fact, current expectation under current legislation and although not g-teed it's every reasonable expectation for the future.

As I understand it, with pensions all the money you save can only go to your spouse when you die. If however, your spouse dies before you or dies shortly after you (before using the money) then the money from your pension disappears i.e your children do not inherit it. Is this correct?

That may well be the case with defined benefit schemes run by employers. It disappears as far as your concerned and remains in the scheme though some do pay small pensions to your children. A death in service lump sum is payable but only whilst in their employ. This is a major reason for taking a transfer value of a retained benefit (preserved pension/frozen pension) and putting it into ones own personal pension.

EdInvestor

ukbondraider wrote: »

So lets say your retirement pot is £100K and you take out 25% i.e 25K when you retire. Doesnt this mean that 75% of your pension can be effectively taken by the government.

If you die before age 75 whatever is left in the pot will go to your spouse in cash minus a 35% tax charge. If you die after 75, the money can be converted to an annuity for the spouse (thus the insurer gets the money) or she can keeping taking a drawdown income. If the latter when she dies the Govrnment will take around 80% in tax.

Wouldnt you rather have say £85K as a pension pot in your ISA and know that you can put the whole amount to good use regardless what happens.

I agree an ISA is usually a better choice if there is no company contribution. I also don't see why the pre age 75 drawdown rules shouldn't apply for the person's whole lifetime, particularly where people have used the pension as intended ( to draw a retirement income, rather than as an extra tax relieved life insurance policy) .

It seem the main aim of the Government is to deter too many people from getting too much upfront pension tax relief and from abusing the pension system to avoid taxes later.