Advice on choosing between pension lump sum, annuity or drawdown after bereavement

[Cluelesslost]

Hello, I have lost my husband earlier this year and I’ve got no friends or family who I can ask for advice. I guess I should contact a financial advisor but I hear they charge fees so I wonder if anyone here have similar experience…

I am entitled for my late husband’s work pension and I’ve been advised that I have three options: to receive it as lump sum, to transfer to widow’s annuity, or to keep it as income drawdown and rest gets keep on invested.
I’m 53 and we married late in our life so our children are 9 and 15. Fortunately I work full time and my wage is sufficient for bills and day to day expenses but not enough to save for rainy days so I will need to use this inherited money in the future but not immediate future. I was leaning towards drawdown option but as the money remain invested, it can increase or decrease in value depending on market conditions so I feel it is a risk.

Any advice on this?

I appreciate that this is something I should really seek a proper financial advice but I just want to hear from someone who may had to make similar decision.

thank you for your help.

You definitely should take professional advice on this; ask around for an independent financial advisor (they don't have to be local). A small outlay on advice could save you thousands over the years.

How much money are we talking about?

It doesn’t sound as though you need the income at the moment so I would probably stay away from the annuity option.

Taking it as either drawdown or a lump sum means you’re going to have to do something with the money - leaving it as cash for the long term if it’s a significant amount probably isn’t sensible due to inflation.

i know they charge a fee, but I’d definitely speak with a financial adviser if it’s a significant sum.

You do need a financial adviser, but before you get there, I recommend exploring this yourself and getting informed so that when you are paying for the advice you’ve really got a grip of what the options are and it’s not a blur of advice you don’t understand fully. Start with the moneyhelper website which offers govt backed guidance on pensions. Ask the same question as here on the moneysavingexpert pension forum, watch some YouTube videos on pension investing, ask ChatGPT - it’s surprisingly good and will explain things well but don’t rely on it in isolation.

To answer your question if it were me and without knowing how much you are looking at, I would be unlikely to take an annuity but would certainly explore it and weigh it up. With an annuity or starting drawdown, if you have enough income to cover you already then you’ll just end up paying tax annually on additional income you don’t need right now. I personally would take the lump sum, then divide it in different ways, keeping a good portion in low risk ‘cash’ style investments like a high return savings account, or premium bonds so I had access if I needed it, the remainder I would invest in higher risk pots and/or longer term/low risk gilts if I was sure I didn’t need it quickly. I would over time, think about the best tax management and start to pull some into stocks and shares ISAs and also max my own pension by using the lump sum cash as a cushion and investing a healthy percentage of earned income. I would start junior ISAs for my kids and LISAs when they hit 18. Be really careful where you seek financial advice, choose the advisor carefully and independently research options they recommend before pressing go.

I’m so sorry you lost your husband x

Get advice.... Beneficiary pension law is different to normal pension law. So much of it depends on the form of the original pension trust.

im sorry for your loss.

completely agree with PP that your first task is to get to grips with the consequences of the different options, including any tax for you to pay. This will depend on the age your husband was when you inherited, by when you need to decide and what you would do with the lump sum.

I too was working full time when I inherited, had no pressing debts I needed the lump sum to pay off for left it all invested do I could draw down anytime I needed anything.

your situation may be different , the way forward is to get the information first about what might and would happen before you decide. A financial advisor can be helpful to support you but ultimately you will need to make decisions, hzvingcgve information will help you make the right choice for you and your children.

Do you have quotes from the pension scheme as to how much you would get in each scenario? Is the widow’s pension for life and with inflation protection? Depending on your own pension situation that could be very valuable. Would the children also have pensions in any of these scenarios?

Sadly I had to make similar decisions recently and had some helpful advice from financial advisors (I saw a couple) before I did. I would really recommend that, especially if it is a significant sum.

The first thing to sort is how old your husband was when he died, because that determines the tax. If under 75, the whole pot comes to you income-tax-free whichever option you take, as long as the scheme sets it up (designates it) within two years of being told about the death - if you miss that window the tax-free treatment disappears. 75 or over and anything you draw is taxed as your income, so a big lump sum in one tax year can push you into a higher band.

Secondly, drawdown doesn't mean you have to take an income or ride the stock market. You can leave it in a cautious or cash-type fund inside the plan and dip in when you need to, which sounds like exactly the emergency fund you're missing. You can also mix - take a slice as a lump sum now and leave the rest in drawdown.

Get the scheme to confirm in writing what his age at death means for tax before you sign anything. MoneyHelper's pensions helpline is free and will go through it with you.

I've got a one-page list of the questions to put to a pension scheme about a death benefit - message me and I'll send it.

Annuities are high ATM. You don't have to accept what they off er you for the annuity. You could take the lumpsum and buy an annuity through retirement line. They are like a comparison website for annuities. I'm buying one at the moment and Canada Life is offering most money. I'm buying a ten year fixed annuity. It will be paid for 10 years even if I die. They also so lifetime annuities or other fixed rate terms. Give them a call it's free. They will give you a quote but won't advise you what to do.

Not very savvy financially. Just be aware of tax implications.

Here's what I did / which has worked well.

I used to work for a large financial institution and through it had a very healthy pension - largely through additional contributions. When I retired their recommended pension provider was legal and general. Other than the tax free lump sum I havent needed to touch my funds yet. I transferred my pension to the L&G pension just shy of 3 years ago and took the max
( 25%) tax free sum. In the almost 3 years since it's performed very well and has increased in value by 30%. It rises and falls with the stock market but even with recent volatility has done very well.

I find the web site very easy to track performance and my one withdrawal was efficient.