Questions of Cash: Should I be starting to draw my pension now?
Q. I'm 56, recently redundant. If I wait until 60 I should get a pension of £8,000. I'm thinking it might be better to start drawing it now to ensure I get it.
Q. I'm 56, recently redundant. If I wait until 60 I should get a pension of £8,000. I'm thinking it might be better to start drawing it now to ensure I get it. I have options now of £7,480, or £5,636 plus a lump sum of £21,796. Would you advise taking the lump sum option?
BG, by e-mail.
A. On the assumption that yours is a final salary occupational pension, John Shackleton, pensions specialist at Worldwide IFA, says: "For taking the benefit three years early, the actuarial reduction seems very low, reducing the annual income by just £466 per annum. This means that you will receive three years' income (£22,440) for forgoing an additional £466 for life from age 60. Simple maths shows that if you delayed taking the income until age 60, you would need to live to age 108 to get your money back."
Whether you should take a lump sum now and forgo some of your annual income depends on personal circumstances, including existing debts, state of health and whether you have dependants. Mr Shackleton says that if you are married and your scheme includes a 50 per cent spouse's pension, then taking cash may be the best option. But if you are single, do not have debts and do not need the cash, then you would probably be best off not taking the lump sum. You should take independent advice from a pensions specialist IFA, particularly if you are concerned about the ongoing viability of your pension scheme.
Q. I was sold a Scottish Provident endowment in 1990 by M J Palfrey & Co, which has gone into liquidation. This policy matures in 2015, when I will be 70. If I had not been advised to take out an endowment I would not have bought the house.
I applied for mis-selling compensation from the Financial Services Compensation Scheme because I will not have the means to make repayments during the later years of the policy. But the FSCS rejected my claim on the basis that I took out a second endowment in 1999 to produce a lump sum when I reach 64, demonstrating that I was aware of the problem and that I should have claimed within two years of that time. But during the 1990s I was living in Hong Kong and unaware of the endowment mis-selling debate. What can I do?
A. The Financial Ombudsman Service (FOS) has no remit to review decisions of the FSCS. But the FSCS has three levels of review available to complainants unhappy about a decision or the process. Where it is the decision being appealed you should write to the FSCS requesting the case be reviewed. If you remain unhappy you can seek a second review by a senior manager and if you are still dissatisfied you can ask the chief executive to review the case personally.
Another option is to seek a judicial review of an FSCS decision, but given the likely costs involved this is probably not practicable. It is not possible to sue the FSCS, as it was not party to your transaction. Some people in the industry suspect the FSCS takes a more conservative interpretation of alleged mis-selling than does FOS.
Q. I frequently see advice to reduce parents' inheritance tax (IHT) burden by making annual gifts of up to £3,000 to children on the assumption that the parent will live for seven years after the gift. Can each parent make the gift, and can it be to each of a number of children, and also what documentary evidence is needed to prove to the Inland Revenue that the gift has been made?
A. Ian Luder, tax partner at the accountant Grant Thornton, says: "Everyone has a £3,000 annual exemption for IHT. This means that you and your wife can each gift up to a maximum £3,000 per year free of IHT, independent of surviving longer than seven years after the gift. The £3,000 exemption is per donor, not per donee. Thus you cannot gift £3,000 to each child, but £3,000 spread among them.
"If you did not use your £3,000 exemption last year, you can bring it forward and gift £6,000 this year. This applies only to the last tax year. There is the Small Gift Exemption, whereby you can make an unlimited number of gifts of up to £250 per donee. However once this limit is exceeded, the exemption is removed. Thus you cannot gift £3,000 plus £250 to a child, even if you have only one child.
"Regular gifts to children which can be demonstrated as having been made out of your income, and which do not reduce your standard of living, may also be exempt. These do not have to be cash: they might be premiums on a life policy.
"IHT exemptions are available for gifts to couples planning to marry. Parents can gift up to £5,000 each, and grandparents up to £2,500 each, without any IHT liability. Friends or other relatives can gift up to £1,000. Although there is no statutory requirement to keep any documentation as evidence of a gift, it is good practice to make gifts by cheque, and keep a formal record. A letter to the beneficiary is often useful, although inappropriate if the child is very young. Your executors will appreciate a clear record of gifts in your financial records."
* If you have questions, write to Questions of Cash, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail firstname.lastname@example.org. We can reply only to letters published. Please send copies, not originals.
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