Terminal Illness and Pensions
If you have a terminal illness, then you need to consider your pension very carefully. If your consultant or GP will confirm in writing that you have less than 12 months to live, then legislation allows pensions you have not yet taken to be paid as a tax-free lump sum. If you have longer than 12 months, you might want to consider waiting to take all of your pension.
Personal Pensions and Terminal Illness
So if you have a personal pension, rather than buy an annuity with it, or even an impaired life annuity, or entering drawdown, or indeed using the new flexibilities, you can if you meet this criteria, just have a it all paid to you tax-free.
Supposing you have a pension fund of £50,000 which you have not taken. If you have a terminal illness and your doctor confirms that you have less than 12 months to live, then you can have the £50,000 paid as a one off tax-free lump sum. If you take it under the flexible rules, then you could pay income tax on it.
In these circumstances it would also be possible to buy an impaired life annuity with the proceeds instead. This would allow you to take 25% of the fund as a tax-free lump sum. However, the remaining 75% would be converted into an annuity, which would provide taxable income.
Please note however, once the money comes out of the pension it will form part of your estate, and be potentially liable to inheritance tax. If the sums are large then it might make sense not to do it all, as most pensions are in trust.
Final Salary Schemes
If you have a final salary scheme, then the rules of the scheme take precedence. If you are diagnosed as terminally ill some schemes offer an accelerated payment of the first five years of income and lump sum, but some have no ability or facility to take any benefits.
If you have a final salary scheme which you have not taken, and are terminally ill then you may have a more unusual option that might work. The scheme will have its own rules as to what it can offer, and you'd normally be tied to that.
However, there is potentially another option. It is often possible to ask the scheme for a transfer value. They will calculate what the value of the pension is for someone with normal life expectancy.
An example will explain this:
Mr Osbourne is 64, and is due a pension of say £3,000 at age 65. This is a pension that would be paid for all his life, and half on his death for Mrs Osbourne.
Mr Osbourne is terminally ill, and his doctor has confirmed he has less than 12 months to live.
Option 1: Taking scheme benefits from the final salary scheme
The scheme allows him to take his pension, and will pay him the £3,000 until he dies (with a five year guarantee), and then the income will halve for Mrs Osbourne. It is a fully inflation proofed income. So, £3,000 of taxable income will be paid for five years, dropping down to £1,500 per year of taxable income for Mrs Osbourne.
Option 2: Using personal pension legislation
Now, if the scheme was asked instead to provide a transfer value, they would calculate the cost of providing a 65 year old with normal life expectancy a pension of £3,000 per year, and then do some number crunching to give a transfer value.
Suppose the scheme assess the cost of a £3,000 per year pension for a 65 year old, should be around £100,000 for a 64 year old (schemes vary considerably in their calculations). So, instead this money is transferred to a personal pension. He provides medical evidence to the personal pension provider that he is terminally ill and has less than 12 months to live. The personal pension company pay out a cheque for £100,000 tax free.
So, instead of £3,000 per year paid as a taxable amount, and then £1,500 for Mrs Osboure (minus tax), they have £100,000 income tax free, in their bank.
Remember the transfer value is based on paying the retirement income as though you had a normal life expectancy, to around age 84.
The larger the pension, and the nearer to retirement age you are the bigger the transfer value. And transfer values have increased considerably too in recent years.
Please note it would be important to consider whether the scheme offered a better option, as it might also include some spouses benefits, and whether they'd be important.
The key point is that the final salary scheme will not necessarily tell you that a transfer value might be better than what they can offer (if indeed it can offer anything immediately).
If you have a question about your pension or want to chat through what it means for you in more detail, or how we can help investigate this for you. then contact us online or phone 0800 011 2713.
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Either contact us online or call 0800 011 2713.