I have both a private pension, currently worth about £220,000, and one from my employer. The employer one is with the Local Authority scheme and I’ve built up a considerable entitlement over a period of 23 years’ service. I’m approaching retirement age – I’m currently age 64 and due to retire in 2022 – and have begun to look at what I might do with my pensions when I do retire. To be honest, I don’t think I’m going to need my private pension for income for me or my wife, as she has her own personal pension and a spousal pension from my scheme if I should die before her. I know I can withdraw the money from my private pension when I retire: should I take it all out of the pension and invest it so that I can leave the cash to my children when I die?
Carl Lamb, Chartered Financial Planner at Smith & Pinching Responds
There are two important points to make at the outset here: firstly, under the current rules any unspent pension savings you have on your death can be passed to your heirs and secondly, pension savings are investments so you don’t need to withdraw them in order for them to be “invested”. It is, however, critical that you keep your pension investments under review to make sure they are on track to meet your objectives.
I am certain you would benefit from doing some proper financial planning so that you can understand what your needs will be in retirement and then make provision for your heirs accordingly.
A critical consideration for you at this point might be the potential value of your estate on your death: pension savings are normally considered outside your estate for Inheritance Tax purposes so it may be of benefit to leave them within the pension framework during your lifetime. Growth within pension investments also benefits from advantageous tax treatment.
After withdrawing any Pension Commencement Lump Sum, the withdrawals you make from your pension fund will be treated as income for tax purposes, so it is essential that you schedule any withdrawals you do make carefully to manage your tax liabilities. You could, for example, end up in a higher tax bracket if you take out a significant sum within a single tax year.
For personal pensions, the death benefit is the value of the pension fund at the date of death. This is distributed at the discretion of the pension company but the scheme administrators will normally take your wishes into account. These are recorded by them through a Death Benefit Expression of Wishes form. It is important to record your wishes in this way so that you ensure those you want to benefit do so.
The person who inherits the benefits can either take them as a lump sum, income or alternatively transfer into a pension fund in their own right if the member dies before starting to draw the pension. If the member dies in retirement, then the entitlement will depend on the type of pension income being taken. This is complex area of planning and taking professional advice is critical in the circumstances you have given above.
Any opinions expressed in this article do not constitute advice. The value of your investment can go down as well as up and you may get back less than the amount invested.