Yahoo Finance ‘I’m 46 and don’t have long to live – can I access my pension early?’
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At a glance, Catherine Gladwyn has it all. She earns £125,000 a year as a virtual assistant and owns three of the 12 houses on her street, living in one while renting out the other two. Taken together, her property assets are worth around £500,000 – and she has already paid off the mortgage on her home at the age of 46.
But life has been cruel to Ms Gladwyn. An incurable brain tumour, first diagnosed in 2011 and removed in 2012, returned in 2014. After Ms Gladwyn endured several rounds of chemotherapy, and later several surgical procedures between 2019 and 2022, doctors told her it would no longer be safe to operate.
The tumour has a high mitotic rate – meaning Ms Gladwyn has a low chance of survival. Symptoms of the life-limiting cancer mean she is already unable to travel abroad and cannot afford to take out life insurance if she can no longer work.
In spite of all this, doctors have refused to confirm how long Ms Gladwyn has left to live, which poses a problem with the £10,000 she has in her pension with Aegon, who cannot let her access the money early due to tax laws.
For Ms Gladwyn, accessing the funds in her pension in her final year of life would be meaningless, as she estimates the cancer will have reduced her quality of life to a point where she will no longer be able to enjoy the money.
“What use is money that's yours if you aren't well enough to spend it?” she says.
Aside from her pension, Ms Gladwyn says the rent brought in by her buy-to-lets has all been spent on funding renovations to the properties. She still has mortgage debt of £125,000 across the two rentals. Ms Gladwyn also has cash funds of £61,000 – and no savings to speak of.
Ms Gladwyn’s will and power of attorney arrangements have all been sorted – and she intends to leave her wealth in its entirety to her 24-year-old daughter. In the interim, she hopes to make the most out of her money while she can.
“I would like to use the money to put aside so my partner can take a 12-month sabbatical and we can make some wonderful memories together without worrying about bills,” she says.
“We love Wales and I'd like to be able to make the drive to the Lake District, as I have only been once and fell deeply in love with it.”
Nick Onslow, Chartered Financial Planner at Progeny Wealth
Initial things to consider in Ms Gladwyn’s case are the existence of a will and lasting powers of attorney, as a good financial plan is complemented by having a good legal plan running alongside it. Ms Gladwyn has quite rightly updated these which will ensure that her assets will pass to her daughter in line with her wishes and any care decisions will be made by the people she has chosen.
The next is whether inheritance tax will be payable. We are all entitled to give away assets of £325,000, however, an additional £175,000 allowance is available, but only when your main residence is passed down to children, grandchildren, and great-grandchildren. In Ms Gladwyn’s case, the house will pass to her daughter, giving her total nil-rate bands of £500,000.
Ms Gladwyn needs to add up her total assets, less any mortgages, and should her total exceed £500,000 this will attract a 40pc IHT charge on death. The amount owed is payable six months after the end of the month in which the person dies.
Ms Gladwyn has an Aegon “money purchase” (sometimes called defined contribution) pension worth £10,000, which isn’t an asset included in her will and is therefore outside of her estate for IHT purposes. Whilst I appreciate that she would like to access these funds, bringing them into her estate right now and not spending them might add an additional £4,000 to her IHT liability.
She has nominated her daughter as the beneficiary of her pension scheme via an expression of wishes form and in the likelihood that Ms Gladwyn dies before age 75, these pension funds would pass tax-free to her either as a lump sum or they could be retained as a pension.
I think we need to look at what would happen should Ms Gladwyn live for longer than she expects but is not able to work. She could initially use her cash assets and any rental income to supplement her income shortfall. After that, she would only have her three houses left but as she is under 55 she wouldn’t be able to take any equity release from her own home. She would however have the option of selling one or both of her buy-to-let properties to provide her with an income.
Felix Milton, chartered financial planner at Philip J Milton
Unfortunately, there are only a limited set of circumstances in which you can access a pension before age 55 and Ms Gladwyn’s situation, unfortunately, is one of these. The scheme administrator must have evidence that the individual has less than one year to live to stop unauthorised pension access, which can be taxed at up to 55pc.
From the information provided, Ms Gladwyn is likely to have an IHT liability on her estate. Pensions can be left completely tax-free if death occurs before age seventy-five and I would recommend that Ms Gladwyn leaves her pension as it is for her daughter to avoid adding further funds to her estate.
Ms Gladwyn should instead spend her cash savings on meeting her goal of travelling and making memories with her partner.
Whilst tax planning may not be a top priority for Ms Gladwyn, as she earns £125,000 a year, she effectively pays a marginal rate of income tax of 60pc on her earnings between £100,000 and £125,000 due to the tapering of her personal allowance, which sees £1 of personal allowance lost for every £2 of earnings over £100,000.
Ms Gladwyn could apply some of her cash funds to her pension, securing higher-rate tax relief and also reclaiming her personal allowance at the same time. Though she must be careful HMRC does not deem her to be deliberately trying to avoid IHT.
She may wish to look at disposing of one of the buy-to-let properties and placing potentially the full proceeds into her pension using the “carry forward” pension rules in this respect.
Lastly, as she is a higher-rate tax payer she can only earn £500 in interest before it is subject to tax. I suggest that she looks to make use of her annual Isa allowance by applying £20,000 of her savings into an Isa before the end of the tax year and then again immediately on 6 April, as she will then be able to shelter the interest earned on the account from higher rates of tax. She should be easily able to earn at least 3pc on her cash savings.
