Show notes
In this Meaningful Money Q&A episode, Pete and Roger answer six listener questions on pensions, retirement planning and tax for a UK audience. We cover whether to put life insurance into trust, how to reduce the 60% marginal tax trap around £100k income, and whether taking a defined benefit pension early can make sense when health is a factor. Plus, we explain the Royal Mail Collective Defined Contribution (CDC) pension, share practical guidance on dealing with overseas pensions, and discuss when to take 25% tax-free cash for the best outcome. Shownotes: https://meaningfulmoney.tv/QA51 01:36 Question 1 Hi both, I have a question relating to discretionary trusts for life insurance policies. I'm from Scotland, 37, married with 2 young children and have a life assurance policy with Vitality which is currently not in trust. I was considering putting into a trust for the benefits associated to inheritance tax but was looking to get your opinion on whether it was necessary or not, and what the pros/cons are. Thanks, Marc 05:46 Question 2 Hi Pete and Roger I am a relatively latecomer to the podcast - its been a year or so now but your work makes the complications of planning for retirement so much more understandable so thank you for bringing clarity to a very difficult subject. I have two first world questions if I may. Neither are time critical. I am in a fortunate position. DB pensions will kick in over the next 2 years (I am 63) totalling circa £75K pa and with the state pension at 67 it won't be very long - if tax thresholds and rates don't change - before I will be hitting the 60% effective rate. So to delay the inevitable, I am thinking I will need to contribute to a DC pension! As I understand it, if I have a DC scheme for three tax years and presumably contribute to such a scheme each year (say £100?) in the year I hit the £100K income, I will be able to contribute gross £3600 x 4 (so £2160 pa or £8640 in total, less any annual contributions along the way) in the first year or with care spreading that amount over 2-3 years to ease the tax burden. I realise when the money is withdrawn it will still be taxed at my marginal rate, but maybe the 60% marginal rate will have been removed by then - I can hope! Is that right? Have I missed anything or are there any other techniques generally available? I am also in a position that when my wife and I both die, unless carehome fees have eaten into the estate, there will be inheritance tax to pay as our combined wealth is well over £1m and we have already given away what we reasonably can to our children. As I understand it, inheritance tax is payable 6 months after death but all being well probate will be granted well before that so our bank accounts can be used to pay the tax (our children have financial and health powers of attorney but they are irrelevant on death). Apart from incredibly expensive life assurance or a lifetime gift of cash for this purpose, is there anything else we can do to facilitate payment (the nature of our affairs means there's not much more we can do to mitigate the liability itself, ie the vast majority of the value is in the family home!) Many thanks, David 11:46 Question 3 Hi Roger and Pete, First of all thank you for all the content you provide, it has been incredibly useful as I start to really take the idea of early retirement seriously. I am 49 and looking to retire as early as financially possible as I have medical issues that mean my life expectancy is somewhat curtailed - though I plan on defying the inevitable for as long as possible. I have a DC pension which I plan to access as soon as I stop working in hopefully 10 years' time. I also have an index-linked deferred DB pension which provides a 50% widows pension as one of the benefits. I am torn between accessing this 6 years early (with a 25% reduction) as I start drawing from my DC pension, or delaying so that my wife is better taken care of later in life. Whatever I choose, all the projections seem to stack up that my DC pension should last into my 90s, but I'm acutely aware that I will probably want to go a bit overboard when I first retire and try to maximise travel and experiences. My question is, am I missing something in the DB trade off? Assuming I live a while after retiring, accessing the pension early will take a decent amount of time before we're financially worse off than we would have been if we'd waited (~13 years). However the combined loss of my state pension and the smaller DB income could leave my wife short of funds. I would really appreciate your perspective on this scenario and anything else you think I might want to consider, many thanks again for all of your words of wisdom, Dan Meaningful Academy Retirement Planning: https://meaningfulacademy.com/retirementplanning 19:40 Question 4 Hi Pete and Roger! My partner works for Royal Mail, she is under the new starters contract and started in 2022, at which point the pension scheme was a typical defined contribution scheme with very generous contribution levels from the employer of 10% with a 6% contribution from the employee. This was 'easy' to make assumptions on for compound calculations to plan for our very far away retirement as we are both currently 27 years of age. Now this brings me to today's pension scheme, which is known as a Collective Defined Contribution plan. I'm struggling to find any information on this type of scheme as it seems to be the first of its kind in the UK, and seems to have been used for a while in the Netherlands. Now the wording of the scheme seems to be worded as if it's a Defined Benefit scheme with a lump sum being paid at retirement age and a 'Guaranteed income for life' amount being paid each month, however it has the caveat that the payout per month may decrease if investments do not perform as expected for better or for worse, so this is not a guaranteed amount at all in reality. The issue I have with this is that with a standard DC scheme like my own, if I was to die either before or during retirement, the remaining money in the pot would be inherited by my surviving spouse or if she was to pass away before I do, it would go to the next nominated beneficiary. With the Collective DC scheme, it's worded that if my partner was to die before she claimed it then I would receive the 'income for life' portion at a reduced rate of 50% and lose out on the lump sum entirely or if she was to pass away after claiming it then she would clearly receive the lump sum and I would remain to collect 50% income for life for as long as I remain alive. This seems to be very unfavourable for anyone receiving the benefit of this scheme on the whole. Now with some calculations, not using exact figures but somewhere close, I've just done some comparisons as the new Collective DC plan was sold as far and away a better option than the old DC Plan, but I cannot find a way for it to make sense. It's hard to see how this new scheme is better in any way compared to the old scheme, even if the contributions from the employer look more generous on paper. Is there something I am completely missing or misunderstanding with this new type of pension scheme? I have not seen much content online about it at all and would love for this to be featured in a podcast episode or video or even just for a chat on this matter as I feel very underwater with this. I can't seem to find a good way to factor this pension into our plan as we do plan to retire before the age of 67, this is just the age stated on the CDC scheme for payout so this is the assumption I am working with. There is an option to opt out of the CDC plan and join a regular NEST DC plan instead but this only has 4% employer contributions on top of the 5% employee giving a yearly contribution of x per year. I suppose my main gripe would be how much you would lose out on if the worst was to happen as traditionally this would remain as a pot for next of kin to inherit, however if my partner and I both passed away at age 70 (I certainly hope not!) and didn't have kids under the age of 18, the entire amount of money would be lost. This is the part I'm struggling to wrestle and the NEST pot even looks appealing with this in mind. I know the future is uncertain and we could live to 100, but the chances are relatively low. Apologies this got a bit long and ranty, I would appreciate any feedback. Keep up the amazing work and I have learned loads from your content over the years. Many Thanks, Joe 29:56 Question 5 Hi Pete and Rodger, Like many people these days, I spent part of my career working overseas. I'm now 52 and have been thinking about how best to deal with personal pensions I accrued while working abroad, in my case, in Japan and the United States (both broadly equivalent to 401(k)-type schemes). While working overseas, I didn't accrue sufficient qualifying years to receive any state pension benefits, but I did build up some company personal pension entitlements. The amounts are relatively small (less than £100k in total), which makes me question whether it's worth the time and cost of seeking formal financial advice. My UK-based pensions and ISAs are relatively straightforward and well organised, but these overseas pots feel more cumbersome by comparison. I imagine there must be many people in a similar position, holding small overseas pension pots and unsure what the most sensible approach is. From an administrative perspective, it feels as though the simplest option may be to access these pensions as soon as I reach the relevant retirement ages, rather than continuing to manage them long term. That said, I'd welcome any general thoughts or guidance on typical approaches people take in this situation, and any obvious pitfalls to be aware of. Many thanks, Lawrence Perceptive Planning - https://www.perceptiveplanning.co.uk 34:20 Question 6 58 now and both thinking of retiring at 61 with no mortgage and kids self sufficient. At age 61 we will have around £300k in savings (inc stocks n shares ISAs, cash ISAs, Premium Bonds and Bank Accounts) and between us will have around £450k in Pensions at age 67 and the wife will get a £7k a year NHS DB pension. Our idea is to live off the cash first from age 61 till age 67 to let the pension pot grow to its absolute max and then draw down the 25% tax free to add to state pension at age 67 then live off the rest at about 4% per year BUT others say take the tax free 25% before 67 because if do it at 67 it will add to the state pension taking you over the personal allowance! We want to let the pot grow more for actual retirement age of 67 onwards and leave more for the kids inheritance long term if we don't use it all so unsure what to do. For clarity, it's our intention to lump sum some money in to our pensions and ISAs in April with some of our 'available cash' and may also lump sum in to my Stocks n Shares ISA to leave it growing for say between 8 to 15 years until we need it. Any advice welcome, Steven. James Shack video on Withdrawal Strategy https://www.youtube.com/watch?v=d4MDvcEcHXI