Pensions - A Matter of Life and Death

It's hardly any wonder the majority of people are sick to the back teeth with pensions. In the last two or three years there's hardly been a week that's gone by without yet another pensions scandal. Only the other day 'Which' has aimed another broadside at pensions.

Now I now happen to think 'Which' should stick to telling us which washing machine to buy because it obviously doesn't understand money. How it can find that millions of people in retirement are being short-changed by contracting-out of SERPS is beyond me. SERPS incidentally is not the French national railway line, it's the Second State Pension, initially introduced in 1978 and then upgraded and privatised in 1988.

It's been a given view of experts, if you were contracted-out of SERPS, you should be back in again by age 50. Now amazingly enough - although I know I don't look it - I'm 58 and I'm still contracted-out. Why's that? Simply because I don't trust Governments to deliver promises, especially on pensions. After all, as far as SERPS is concerned they've already downgraded the benefits twice. Also there's no prospect of getting tax-free cash from the Government version which a private plan should deliver after next April.

But Final Salary Pension Schemes which have also come in for a bit of stick can be like Government plans to the extent that they can be strait-jackets too.

Sadly, we have recently lost two of our clients. Both were members of Final Salary Pension Schemes and both decided to retire early - one at age 55, the other at age 61. They were both toying with the idea of how best to take the benefits from the Final Salary Pension Schemes but, in both cases, nobody else mentioned they had the option of removing the funds from the Final Salary Pension Scheme to have a pension designed specifically for them and their circumstances.

Two years ago, the younger of the two gentlemen could have taken a £40,000 indexed taxed income from the pension plan. On his death that would disappear and be replaced by a £20,000 index widow's pension. When the widow died, nothing left. Instead, he took an individually designed private plan and transferred funds into it. That plan is now worth £700,000 and on his death 100% of that is available tax free to his widow. If she takes that out and puts it in something like an Off-shore Bond, she can draw down £35,000 per annum tax deferred and still have access to the capital.

In the second case, the initial pension income was £110,000 a year with a widow's pension available of £55,000, taxable. Thanks to a few quirks in pension legislation, that was exchanged for a Self Invested Plan that will provide 100% of the fund value, which is considerable, on death to the widow or family.

In both cases, the proceeds can be free of Inheritance Tax, and income may be withdrawn at any time with hardly any Income Tax payable.

There's a so-called simplification of pensions coming along in April 2006. Many of these clever ways to provide a made-to-measure pension which works on life or death will disappear. We have our clients' pensions up to date. However, if you know of somebody who could benefit from a reappraisal, give us call.


Alan Steel
Alan Steel Asset Management Ltd is authorised and regulated by the Financial Conduct Authority

The Financial Conduct Authority does not regulate tax advice

This article is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.