How can my pension provide for my wife when I die?
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My wife and I are planning to retire this year. I have a private pension fund worth about £550,000 but hers is much smaller at about £30,000. I want to make sure that whatever pension I arrange will provide for her on my death. She is several years younger than me and we’re both fairly cautious. What do you suggest?
Phil Beck of Smith & Pinching responds:
I would need to have a detailed discussion with you and explore your finances thoroughly before making a recommendation, but I can give you a few pointers here.
There are two principal ways to take retirement income from your pension savings: income drawdown and annuities. Both can be set up to provide an income for your wife if you were to die first.
Income drawdown involves investing your pension savings for ongoing growth, then drawing an income direct from the invested fund. One of the main benefits of income drawdown is flexibility – you can vary the amount of income you take during your retirement (it is important to note that the value of the fund will depend on market performance).
On death you can leave any unspent pension to your wife (or indeed any heir) which can be taken either as a lump sum or as income. However, the amount of pension she could draw would be dependent on the value of the remaining pension fund. If she didn’t use the inherited pension, she could then pass the unspent portion on to her heirs.
With annuities, you would need to take out a joint life annuity and name your wife as your beneficiary. Annuities provide a guaranteed income for life. However, they are a one-off purchase and so there would be no benefits to pass to heirs if you and your wife were to die early. They also typically provide a lower income level than you might expect to get from a drawdown arrangement. They can be set up to increase each year, usually in line with inflation.
I suggest that you take independent financial advice before making any decisions about your retirement income. It is also possible to use a combination of annuity and drawdown, and so benefit from the advantages of each, but this needs to be carefully planned and may not be suitable for everyone.
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Any opinions expressed do not constitute advice. The value of your investment can go down as well as up and you may get back less than the amount invested. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
For more information, please visit www.smith-pinching.co.uk