Q. I am approaching the age of 75 and have a personal pension plan which I have not yet touched. I was intending to leave it to my only daughter. However, I am being pestered by my financial adviser to take some money from the fund before I reach 75, but I don’t understand why she is so determined I do so? I just want to leave it for my daughter.
A. The reason your adviser is keen for you to take some money out of the fund is to do with tax efficiency. As you have not yet taken any money from the fund, it is likely that you will be able to take 25% of its value in tax free cash. If you leave the money in the fund, it will be taxed at 45% on your death. Whilst there have been changes to death benefits for personal pension schemes, they are still only tax free on death pre age 75, not afterwards. So by taking the tax free cash before you die this limits the amount of tax you will pay on that amount either entirely or at the worst case scenario to a maximum of 40% assuming that you had to pay Inheritance Tax on the tax free cash taken.
Q. As a New Year’s Resolution, I have decided to review my insurance policies. I have one called a “Permanent Health Insurance”. Is this like PPI?
A. Permanent Health Insurance, sometimes called “Income Protection”, is a policy which pays an income if you are unable to work due to ill-health or disability. Whereas PPI would relate to a specific loan or credit card payment, Permanent Health Insurance will typically pay out a percentage of your salary or earnings for the time you are unable to work. Payments would continue until you return to work, or until retirement age, which should be set out in the policy schedule. This differs from the Payment Protection Insurance (PPI) where the insurance generally covered payments for a limited period, often with considerable small print which was often not pointed out properly, hence the mis-selling compensation now being paid. The PHI policy would usually have been underwritten based on your occupation and health at the time it was taken out, and many more questions asked to make sure it was suitable and that you would qualify for the benefit when you need it. The benefit would be free from tax, unless it was arranged through your employer, and payments would usually not start until 1,3,6 or 12 months after being unable to work, depending on how your policy was originally set up. This can be a very valuable insurance in the event of a valid claim and it is important to be aware of the circumstances in which you could make a claim. If your occupation has changed since you took the policy out, or if the terms of your employer’s sick pay arrangements have altered, it is worth checking that the policy still matches your requirements. However depending on when you took the plan out, it is possible that a replacement plan might be more expensive, so don’t cancel the policy before you have checked the cost of a replacement. I recommend you first of all check with the adviser who set the plan up for you.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
