Inherited DH pension pot but what to do next

[Flounderinginprobate]

My lovely lovely DH passed in February. He left me 100% beneficiary of his pension pot. He was 77 when he passed and he”d had a chunk of money out but wasn’t taking any money regularly.

pension company given me three options
lump sum (taxable)
drawn down (also taxable)
annuity (also taxable)

im a fair bit younger than DH was, still a few years until retirement age.

I have no idea how to decide what to do (think probably drawdown is best option) after a half hour chat with PensionWise. The advisor told me to get financial advice. Yeah right, who the frig do you trust not to fleece you and how can you get them to be up front about their fees etc.

I’ve booked a free Women’s Wealth telephone appointment, PensionWise 1 hour appointment not available till mid June.

i’ve spent a lot of time looking online about what to do, but I don’t feel it’s directed towards me as a widow, it’s more about taking a pension you saved for yourself (or is that the way I should be looking at it?).

Im finding it hard enough to navigate life without DH I’m really concerned I’m going to make a drastic cock up with my future finances if I’m not careful.

Any thoughts or help would be much appreciated. Thank you.

The question is which scenarios will put you into higher tax brackets? And whether you can get a better interest rate on the lump sum outside the pension.

Annuity rates tend to be pretty awful, I think you could do better investing the money yourself. If the tax wasn't too punitive I would take the lump sum and invest it myself, if the tax rate would be really high drawdown an amount each year to keep in a lower tax band and invest that.

The lowest amount of tax would be if you don't take any money out until you retire, and then take the money as income rather than a lump sum.

All options are taxable but each individual tax year you can have the first £12,570 tax free then just 20% until you have £50,270 from all sources.

So if you are currently earning, any significant amount you take now is likely to push you into the 40% bracket.

Once you are retired, ensure your combined income from your own pension and this pension are no more than £50,270 and you will minimise your tax.

The difference between draw-down and annuity is about long-term sustainability. If the amount you want to take out each month to keep your desired income level is "too high" you could find that the pot runs out when you are 93 and you are then much poorer for a few years before you die. However the benefit is that if you die when you are 71, you can pass on the pot to your own heirs. You cab get certainty by using the annuity option where the income is guaranteed permanent even if you live to be 105, but if you die at 71 your heirs get nothing from the pot.

Please don’t take financial advice from ChatGTP! It’s a guessing machine. Sure, it mostly guesses correctly, but the consequences are dire if it doesn’t.

I promise you I won’t. I’ve heard a lot about it but decided never to touch it.😀

I’m sorry for your loss OP.

Assuming you don’t need to touch it yet, then leave it alone and find a financial advisor. A lot of people worry about them but they are regulated professionals and can be worth their weight in gold. Fees tend to be fairly standard and you can gauge them doing some online research.

In the meantime, there is now a lot of excellent advice online, including YouTube. Get clued up on the basics of pensions to prepare to talk to an IFA.

Pensions don't pay interest- they're invested.

Investments always always do better than savings - considerably so in the long term.

Taking the lump sum (taxed, remember) and 'investing it yourself' makes no sense, you'd save at least 20% by keeping it invested inside the pension. You can move it to a different pension company, and/or change the investments within the pension if you're not happy with the current investment choices.

OP, the pension should remain invested until you decide. There's no separate interest building up anywhere. Joining Rebel Finance - or following a selection of 'beginner investor' educators - is an excellent idea to help you understand your options.

One thing to research before you do anything is find out whether any of the options affect your money puchase annual allowance - this is how much you are allowed to pay into your own pension. Drawing from your pension severely limits how much you can pay in in future, but I don't know if this applies to drawing from an inherited pension.

I quite like this chap's explainers: https://youtube.com/@chrisbourne-retirementplanner?

I'm not sure he's done anything specifically on inherited pensions, but he's good at explaining the different pension drawdown options and the upsides and downsides of each.

Sorry for your loss OP.

My husband has a similar decision to make in relation to his father's inherited pension and like you we've found it difficult to find good information about it.

In my husband's case, he is 48 and not likely to retire before state pension age, and his share of the inherited pension is just over £30k, so not an enormous sum.

Ideally he'd take the lump sum as we want to move house and it would go towards reducing mortgage. However he is a 40% taxpayer so £12k will be swallowed up in tax if he takes the lump sum.

But we're not sure it's worth paying for financial advice for such a (relatively) small sum.

I hope you get the advice you need, it definitely doesn't seem a straightforward decision.

@ScaredSceptic Based on your post, this sounds like you fully understand the situation already so it may be that there isn't much an adviser could add. Your husband can take the money now subject to income tax at his marginal rate (as his father was presumably over 75 when he died). Or he can leave it where it is and benefit from the growth (hopefully) between now and when he retires, then take it out either in a lump sum or gradually, again taxed at his marginal rate (which might well be lower in retirement).

Which is the right option is really just down to your circumstances. You could work out how much interest you'd save by paying £18k off the mortgage (Mortgage Overpayment Calculator: Pay off your debt early?...) and think about that in relation to what he might happen if he leaves it where it is (£30k growing by 5% a year might give you about £77k after 19 years, which in real terms might be worth about £45k. That would then be taxed at whatever your husband's marginal rate is in retirement.) But it's very much finger in the air stuff as you have to make assumptions about growth and inflation, which might not be right.

A good adviser could potentially help you think through the decision. There isn't any solution that avoids the tax, however.

I am a bit confused. But i think it is only taxable as part of your income. If you don't need it, it is best to be kept as it is and let it grow, Did he take the 25% tax free cash out?
I wouldn't do an annuity at this point as you buy a regular income for a set number of years and the lump sun diminishes over time. If you don't need it let it grow.

I'm obviously not qualified to give advice but after exploring financial advisors who didn't seem to know any more than me and wanted a % fee which was going to be ££££, I just put it in a drawdown pension with the same provider, after checking on Money Saving expert that time was well thought of and had reasonable fees.

I figured even if it was not quite the right choice, I'd have been unlikely to be enough better off to cover the fee.

Thank you everyone. There’s a lot of interest help and information. I feel I’ve got more from this than some of the investment and financial stuff I’ve looked at. It’s given me a nice list of pointers, questions to ask and things to be wary of too. I’ve got a couple of free financial appointments booked and I’m telling neither of them about the other.

It does sound like some ifa advice would be good as theres a lot to these decisions that can't really be dealt with on a forum. However it is likely that you'll hold your inherited pension in draw down until you are ready to retire. Be careful about making any withdrawals until then because of MPAA. Also you should check how it is currently invested (sometimes they are converted to cash). Assuming it's some kind of private pension,? If so, you should choose a provider and investment appropriate for your current situation. Certainly an IFA will help you with this and many will work either for commission or one off fee. If it's a big pension then you'll want to get it right.

I don't think any work on commission these days. It's either a set fee or a percentage fee, but no commission for selling products. Led to too many not-independent sales.

Be aware that some IFAs are tied to one or a limited set of companies, and some are 'whole of market'.

Take the amount offered and divide it by the monthly amount and see how long it would take to pay out.
Also how much debt do you have? How much would the interest be?
3rd do you have a mortgage, if you paid it off then your amount would also be worth that much with interest. plus you would still have the money you would have paid on mortgage on top as well.

OP, the IFA… are you looking for advice specifically on the three choices the pension company has offered, or for investment advice on where to put the money once you’ve chosen one of the options?

I’m starting the rebel course next week - sounds great. I wouldn’t put much faith in the pension wise appt they don’t advise as such just explain what things are - mine was a waste of time , he kept banging on about minimum pension age increasing which I repeatedly said didn’t impact me as aim was to go at 55 and he didn’t follow through with any information.

Annuity rates are at the highest they have been in a long time. Of course they depend on various things such as how old you are and your health.

Doing it yourself is perfectly possible without withdrawing your funds from a tax efficient vehicle. If this results in a tax bill, it is really not a clever idea.

Pensions will become subject to IHT in under 2 years’ time. Anybody who has a potential IHT liability already and a pension pot that would put them over the IHT allowance needs to weigh up their options very carefully as, if they died over the age of 75, the funds would be taxed twice, first IHT and then income tax.

You can put up to 60k a year into your own pension tax-free. For the next few years, I would put the maximum from your earnings into your own pension (even if it means all your salary) and instead drawdown from the inherited pension.

This means (1) your own salary goes tax-free into the pension and (2) you may move to a lower tax band so the inherited pension is taxed less.

I second these. Or at least listen to some of the podcasts. They do advocate for people being able to do a lot on their own, or you can use them or at least know what to look for in an advisor/planner when you understand more. Rebel school is also highly recommended which I see you've mentioned. Basically learning as much as you can will help