What happens to a private pension fund once you're dead?

If you use the fund to purchase an annuity, then yes, it does "vaporise", as you so graphically put it.

But it's not wasted, that's how annuities are supposed to work.

They are priced (in terms of how much annual pension you get per pound in the fund) to more or less break even at the average life expectancy for the age at which you start drawing your pension. The money which the annuity provider saves from pensioners who die early covers what they lose on people who live longer.

Another option you have is to use "income drawdown" and delay the purchase of an annuity for as long as possible (age 75 is the current max, I think). Then, if you die before you've purchased an annuity, the fund will still be yours to dispose of with the rest of your estate.

After the fund managers et al cream off their millions in bonuses, it's used to pay pensions to those living to 108.

A bit like car insurance, you're paying for knowing a prang won't bankrupt you, but as you don't prang, the money pays to repair the GTs pranged by daft yoofs.

It depends on when you die. If you die while you're still paying into it then the fund will go intact to your estate (or trustees, if you've put it in trust - which most are). It's the only way of getting 100% of the fund in cash - and with no tax charge. Having said that, some old schemes may well not pay out all the fund but just the premiums paid, with or without interest. If you've got a scheme started before about 1990 it would pay to check the position with the insurer.

Rob Graham

ITYF that the fund mangers cream off their millions from the money as you invest it.

ISTM that the "taking money out" part is very fair by comparison with the "putting it in"part.

tim

Not necessarily - you can choose to have the annuity payments guaranteed for (say) 5 years, or for your spouse to continue to recieve some or all the payments for their lifetime. But of course these options reduce the monthly payment.

You're quite right, of course, but I'm tempted to ask who'd be daft enough to opt for this? If the idea is to benefit a surviving spouse, one would have opted for a joint life annuity anyway, so the surviving widow(er) will continue to receive the pension for the rest of her/his life, though generally at a reduced rate of, what, half or two thirds, so they'll be "all right", after a fashion, bearing in mind that one person can live on less than two could, albeit probably not as comfortably on half.

Answering my own question, I suppose someone may have taken on a mortgage obligation late enough, particularly if retiring early, that the repayment period overlaps into the pension zone, and a guarantee could be tailored to cover the remaining payments.

If I may rephrase my question with the emotive "daft enough" taken out, what other reasons do people normally have for opting for guarantees, and roughly what proportion of annuitants take up these options, given how expensive they are in terms of potentially crippling reductions in the annuity rate?

'Guaranteed for 5 years' turns out to be the default for a whole bunch of life assurance companies .. and actually the reduction (at least when I took mine out) was not that great .. they were stitched up with a spouses pension anyway, so all they were risking was 1/2 the pension payment for up to 5 years.

You also have options for paid monthly, or annually, in advance or arrears and with or without proportion (meaning if you snuff it halfway through a period they may or may not owe/reclaim some part of a payment). Again there are defaults for those, which are a PITA to get amended.

Usually your estate gets the money. But check, because on some older policies, they keep the money.

but if you lose all those years of savings when you die - it doesn't sound like a very clever place to put your money - in fact 'the mattress' sounds like wiser investment - at least your family still have the capital savings you haven't managed to spend

is there laws surround this?

it sounds like all the money you put into your pension fund is not really your own money & if law can insist you lose it then pensions per se are sounding less & less attractive place to put any money at all

at 66 ( a year into retirement)

it does sound like you lose all the money you put into a pension so it doesn't sound like a good place to put money

i was thinking about joining company pension but i wont bother

i'll stick those savings under the mattress and try and spend it all before i die :o)

The mattress wont sound like a good investment if you live to be 99 though, will it?

How do you think we should fund the pensions of the centarians(sp?), if we give those people that only live to 70 100% of their money back?

yes.

That's excatly right. That is the stick for which you got the carrot of tax relief.

No, it's not a law (in the sense of something that the government imposes[1]), it's pure economics. If everyone who lived to below "average" age got 100% of their investment back, those that live over average age would be destitute. Unless YOU are prepared to take this risk with YOUR retirement, it can't work any other way.

tim

[1] It is the law that you buy an annuity, but that isn't why you don't get all your money back.

The trouble is that you don't know when you're going to die. What if you run out of money before you die? Do you opt for suicide? You may find that to be a reasonable strategy, but it wouldn't be to everyone's taste.

If everyone had to save for a retirement which lasts to age 110, just because they *might* live that long, they would have to save an awful lot, to the extent of reducing their pre-retirement standard of living substantially. Think in terms of putting half your life earnings on ice. That's why collectively we have concluded that it's more efficient to club together in what is effectively a kind of "death pact", in which we all save enough for a retirement which lasts only up to (roughly) the average death age. It means that if we do then live to 110, we still keep on drawing the pension, which we effectively get for nothing, because we only contributed on the basis of living to 82 (say). Naturally, the downside is that if we die at 66 (or 81), then most (or some) of our money stays in the pot to help pay for the pensions of all those who survive beyond 82.

It's basically a gamble, but one which comes as close as possible to being loaded in favour of - everyone. Heads we win, tails we don't really lose, because we'll be dead and won't miss it. And we needn't even worry too much about not leaving anything to the kids, because if we want to do that, we should make sure we have a separate additional fortune tucked away somewhere. Hey, they'll get the damned house. Isn't that enough?

Having a pension wont influence how long/short you might live

I assumed (wrongly) that "a pension" was just another way of saving your money to accrue a capital amount that will return enough interest to pay out monthly in your old age

Despite tax benefits, if ultimately it vapourises (unlike any other form of saving) then it's not a good place to put money

Unless i'm missing something almost any other method of saving sounds like a better idea - at least you/your family can claim the capital

I assumed that a pension fund was quite different from other types of investments in that it should yield a much larger income than you would have received had you put the money into some other kind of regular investment. The downside to it is that you don't get your capital investment back when you die. That money goes to produce income for the remaining surviving members of the pension fund.

In this respect it's more like an insurance policy. An insurance policy can pay out an amount for a claim which is larger than the total premiums you have paid in, but you don't get your premiums back if you don't claim.

Chris

That wasn't my point. How long you live influences how much money your mattress needs to contain if it's going to fund your retirement.

If you did know when you're going to die, then you could plan exactly how much you would need to save up in order to secure a known "income" (in terms of living off these mattress-based savings) for the duration of your retirement.

It would mean, therefore, that you could save efficiently, by which I mean you can save just the right amount each month during your working life, so that you neither run out of money before you die, nor run out of life before the money is all gone. You don't want any money to be left over, because it would be wasted (and better spent by allocating yourself more spending-money each month either before or after retirement, or both). Of course if you *also* wanted to save up an additional amount purely for leaving to your heirs, that's fine too, but you could plan that separately in the full knowledge of exactly how much you will need for yourself and exactly how much you want to leave behind.

Well, that's not too far from the truth. You save your money to build up a "pension fund". If you do this privately, using taxed earnings, you can then do what you like with the fund when (or after or before) you retire; since you've already paid tax on the money, and on interest it may earn while it stays invested, the money is all yours "tax free" with no restrictions. If instead you do it in a state-approved pension scheme, with tax relief, then you'll be forced, when you retire, to use most of the money to purchase "an annuity" which is a special kind of insurance-like policy which pays you an income ("a pension") for life, and this income will be subject to income tax.

But even if you don't go for the tax-relief method, i.e. if your pension fund is wholly private ("mattress based" albeit really probably in savings and investments), it may *nevertheless* be a good idea to use it (or some of it) to buy an annuity, which will pay you an income for life which, for technical reasons, will be taxed at a reduced rate.

These technical reasons are that the way annuities work is that the pension income is not entirely generated by interest on the capital, but also partly by depleting the capital itself. The annuity rate, that is to say the annual income you get per pound of pension fund, is therefore greater than interest rates. In the case of an annuity bought with a pension fund which was built up with tax relief, the whole pension is subject to income tax, because the capital element is really just deferred income from your earning days. In the case of an annuity bough with private money, the capital you get back is not taxed again.

This is where you're wrong. Or right. You see, it depends on when you're going to die. If you die younger than average, then you're right, it's not a good place, because you forfeit the rest of your capital to the annuity provider. But if you die older than average, then when what is notionally "your" capital runs out, your pension does not stop.

What you're missing is that by going down the annuity route, you can save more efficiently, thus enjoying a better standard of living during your working life. Of course if you know you're going to die young, it's a different story. Most people don't.

Before GB changed the rules on taxation of the funds in the pension, this was a reasonable expectation.

Now, IMHO putting money in a pension, is money down the drain.

tim

What?? Just because of the dividend tax credit no longer being reclaimable? It's not reclaimable in any other investment type AFAIK, not even ISAs.

The remaining tax advantages of a pension are much more significant than the tax advantages of any other type of investment, particularly for 40% tax payers and those entitled to tax credits.

I suppose what you say is true, but when you take into account the government minimum guarantee (or whatever it's called) you need a to amass a fund of around 250K to actually be any better off after you have taken your pension than you would have been with benefits instead. The changes to tax relief have made this much less likely for most people.

tim

But the same applies to savings in other forms such as ISAs - they'll reduce or eliminate your entitlement to means tested benefits.

The MIG is about 124 pw/189 for couples, most people who have worked for the majority of their working life in a reasonably paid job will get more than that even if just from state pensions (inc SERPS/S2P/GRB).

For the low paid/those who were out of work for a significant time, I'd agree than the MIG, plus housing benefit if they expect to be renting, are very significant reasons not to bother saving for their retirement, but that means saving in *any* form, not just pensions.