This is the final article in our pension myth busting series. Whilst our other articles covered workplace and pension supplier myths, this article covers life expectancy and the state pension.
It is true that those who do not live beyond their mid to late 50s, will not be able to benefit personally from their pension savings. However there is provision for those with terminal illnesses to gain early access.
The majority of us are living longer than previous generations. The average life expectation of a 65 year old man is now 83.5 years and for women 85.9 years. (1)
Studies of consumer attitudes to retirement savings consistently show the majority of respondents have a tendency to underestimate life expectation and the amount of money needed to live a comfortable lifestyle.
Even if someone suffers a lower than average life expectation, private pension savings can be passed on to their chosen dependents either as a lump sum or a regular income stream.
The way this works depends on the type of pension and when it was started.
Final salary pensions sponsored by an employer and promising a given income for life from a set age, often include a pension which continues for the lifetime of a spouse or civil partner. This is usually at a lower level than the deceased' members pension. Cohabitants may or may not qualify the scheme rules will determine this.
Some final salary schemes also provide a lump sum on death, if it occurs prior to the member drawing their pension.
For a final salary scheme, it is best to check the position with the scheme trustees who are obliged to give the rules to members. You should also check that the details of who you wish to receive these sums, recorded with the scheme trustees, is up to date and reflects current circumstances.
Those with private investment based pensions can expect in most cases that the fund built up can be left to someone else in the event death. So long as that is done within 2 years of date of death and the deceased is under age 75 at the date of death, the payment is tax free.
If over 75 at the date of death, the pension when withdrawn will be subject to income tax at whatever rate the recipient(s) pay.
Up until 2015 pension funds left on death had to be paid as lump sums or converted to a lifetime income for a dependent. These options continue to be available but new rules offer a third way of passing on funds not spent at date of death.
From April 2015 inherited pension funds can be retained in a pension fund which the nominated recipient can then access as and when needed. They can choose to take lump sums or regular income or use some of the fund to buy a fixed lifetime income. For larger funds a combination of these options can be chosen. If the nominated recipient does not need lump sums or income immediately, they can leave the fund invested to continue to grow until they do, with no tax payable on it in the meantime.
If they then die leaving a residual fund it can be passed on in the same way to their nominated beneficiaries. This can continue over several generations until the fund has been spent.
Pension plans started before April 2015, may or may not include all of these options. So it is best to check with the provider. Those plans which do not include all the inheritability options of newer plans, can often be swapped for a new pension plan that does include them. However before updating to a new plan, it is important to check that other valuable guaranteed benefits will not be lost, nor any penalties be applied.
Pension funds left on death do not form part of an individual's estate for inheritance tax purposes, except where they are transferred in death bed scenarios. So far from being lost on death, most pension funds can be left to others who may benefit from those savings and they are usually inheritance tax free.
Trust based employer sponsored schemes will set out the benefits payable on death in the scheme rules. The trustees will require you to nominate individuals who you wish to receive these benefits. It is important to keep your nominations up to date if circumstances change. This is what will guide the trustees after your death. They may otherwise have to use their discretion without knowing what your wishes were.
Private pensions also require a nomination to be made in order that the scheme administrator, usually the provider, can take account of your wishes when transferring pension funds to your preferred beneficiaries. These are simple forms and while legal advice may be sought before completing them, it is not a requirement.
It is true that every UK resident adult is eligible to participate in the State pension but the pension payable depends on their National Insurance (NI) contribution record. For pensions built up before 2016, it will also depend upon their earnings and whether or not any employments were contracted out.
The State pension is £159.50 per week. It is taxable income but paid with no tax deducted, this is collected via self assessment tax returns.
To get the full pension, 35 years of NI credits are required. Those who have less than this will only get a State pension if they have at least 11 years credits.
You may not have a full record of credits if you have worked abroad, earn less than £5,896 p.a. or have been studying full time after age 16.
Credits arise from :-
To find out if you are likely to have enough credits for a full State pension form BR 19 from the Department for Work & Pensions website can be completed. This enables DWP to forecast the State pension accrued to date, the date when it will start and if applicable, how much you need to pay to buy extra credits.
Some people will get more than the State pension if they had higher earnings and were contracted in to the State scheme between 1976 and 2016. Various schemes known as Graduated pension, SERPS and Second State Pension operated during that period. The amount of these pensions will be shown on the DWP forecast. It is called the additional state pension. It can more than double the State pension.
Some people will get less than the State pension, even though they have worked and paid NI for more than 35 years. This is because in some of those years they contracted out of the State top up scheme and paid a lower rate of NI or they received contracted out payments from DWP into a private pension scheme.
It is also possible to have a combination of additional pension for the years contracted in and deductions for the years contracted out.
The only way to find out what you can expect and whether it would be advantageous to make voluntary payments in, is to get the DWP forecast. It is a good first step to planning your retirement and can be obtained at no cost.
Director of Public Policy, LEBC
Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment or product for your circumstances please contact an adviser. The Financial Conduct Authority does not regulate tax planning. Tax rates and allowances may change in future.
(1) ONS National Life Tables UK 2013-15Back to News & Views