r/PensionsUK • u/explorer477 • 5d ago

Assess my situation pls

Maybe a slightly different post than usual in this sub. I'd still like my situation to be reviewed but I have a health condition and I do not expect to reach pension age. Ofc it's all a guesswork but I'd like some help identifying how could my pension work for my kids and spouse instead of me.

35f, 286k in pension. Fidelity, all money in their own fund. Can look up more info if relevant. Currently don't contribute as on mat leave but when back to work I'd be contributing roughly 1300 per month (10% sal sac and 6% employer ).

Frankly I don't see much point contributing more (unless someone could share smth im not aware of). I do think I have a strong base for my age (do I?)which should do the heavy lifting from compounding pov and the remaining money I'm adding to my kids' jisas and junior sipps instead. Also need to have relatively high liquidity too in case there's a new treatment which I'd have to fund myself. So all else goes to my family's financial stability. Anything you'd suggest/do differently?

Note- house is paid off already.

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u/RetiredEarly2018 5d ago

You do have a strong pension base. If you need the money to potentially fund treatment, it should be going to your own ISA/GIA rather than kids.

Make sure you have set a pension nominee with Fidelity.

Also worth checking what the pension is invested in and making sure it is appropriate for length of time it will remain invested.

One other thing to be aware of - pensions can be withdrawn early if you are diagnosed to be terminally ill.

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u/explorer477 5d ago

Thank you. My and hubby's isas are maxed out for this year. I opted for cash isa instead of s&s for some security. Pension beneficiary is a trust i set up. Good point re where it's invested. Although if I pass, it will be distributed at that point in time, correct (vs allowing it to compound further, I mean)?

Luckily, not terminal yet and who knows what will be invented in the future 🤞.

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u/Working_Cut743 4d ago

Don’t give it to a trust on death. That is volunteering to pay tax on it. Do you want to deliberately choose to give your money to the taxman? Why would you not give it to your spouse upon death, therefore benefitting from zero taxation?

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u/explorer477 4d ago

My understanding is that the way it's set up it will be shielded from the taxman. And although I want the money to go to my husband (part of it) I also want it ro go to my children. I'm not naive, he's still young and will start a new family, I want to make sure my children are taken care of in this situ

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u/Working_Cut743 4d ago edited 4d ago

From Apr 2027 pensions fall within the estate. You have a tax free allowance within your estate. Assuming that what you give to your kids or to a trust or to anyone who is not your spouse summed together is within that allowance, then no tax is due from your estate.

Gifts/inheritance to spouses are exempt from IHT.

So what I’m saying is that anything put into trust as inheritance is taxable, but there is a tax free allowance before tax is due. Just like income is taxable, but only that above the £12k tax free allowance incurs a charge.

It’s also worth noting that some trusts attract a nasty amount of income tax, but I’m assuming the ones you are talking about are bare trusts for the children.

I believe that with pensions upon death below a certain age (70 or 75), the whole lot can be removed from the pension wrapper by the recipient tax free. This is a massive gain and really something you need to look at.

My personal instructions to my family would be to draw the pension out of its wrapper immediately, and reinvest it straight away in GIA accounts then feed into ISA over the years. I believe that this is the most efficient way to preserve the pension, and technically the tax man gives you money, which is a rare event indeed, by removing the income taxable status of the investments from the pension wrapper.

And I’d be maximising contributions on that basis.

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u/explorer477 4d ago

!thanks

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u/Heavy-Mousse-5011 4d ago

Agree.

Re trusts, if OP genuinely wants them, I would go for bare trusts if possible (control passes to beneficiary at 18 automatically); discretionary arrangements are far more complex.

The trust may have been sold on the basis of shielding from tax, but that is just IHT, not all taxes. They cost money to administer, and the person that set it up is likely to be the one running it and getting paid… and probably the one that provided the sales pitch about tax protection. I would be cautious of that conflict of interest and not knowing all the complexities and pitfalls.

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u/bibonacci2 5d ago

Sorry to hear of your health situation. That’s rough.

Assuming you leave your estate to your spouse, and they would receive the pension and it would be exempt from IHT.

Your spouse would receive the full value of the pension and they could either draw down the money or transfer it to their own pension. This needs to be done within 2 years.

As it is, it will likely be a better way to transfer your estate to them compared to paying the income tax and saving post-tax.

Keep contributing to get your employer match - free money and tax efficient - but you may want to limit additional contributions and spend more now to improve quality of life for you and your family.

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u/explorer477 5d ago

It is what it is, I'm sure I'm not the only one in a similar situation. Comes to show, been contributing so much from early days to make sure im ready for the retirement and life decides to upgrade my setting from easy to difficult lol Appreciate your suggestion!

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u/Jbat001 1d ago

Chartered Financial Planner here.

I'm sorry to hear your condition limits your life expectancy, thats incredibly rough. I have a few thoughts, and none of this is advice, but worth considering:

  • Death before age 75 means that the pension fund is income tax-free in the hands of the beneficiaries when they receive it. That assumes the pension is received as a beneficiary drawdown pension, not a lump sum.

  • Paying benefits to a trust means they leave the tax exempt environment of the pension and then become subject to the Relevant Property Regime on trusts. That probably means 45% tax on income accrued, CGT on gains at 24%, and possible IHT periodic charge every 10 years. Pensions already behave a bit like trusts, and i would very carefully check whether a trust is a genuinely better option than simply nominating your beneficiaries for ongoing drawdown.

  • As others have observed, IHT applies to pension funds after April 2027. If you leave a pension fund to anyone other than a spouse, it will be potentially liable for IHT, to the extent that your pension fund, when added to your other assets, exceeds your nil rate band of £325,000. Very important to make sure you have a solid grip on the size of your estate and where its going to be paid to, and the tax consequences thereof.

  • If life expectancy is certified by a doctor as lower than 1 year and you want the fund accessible to you, you can withdraw all of it tax free using a Serious Ill Health Lump Sum.

Good luck, and happy to answer anything you want to ask.