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‘I’m 73 and don’t know what to do with my multiple pensions worth hundreds of thousands’

Wilf McLellan - Hatton of Fintray - Aberdeenshire
Wilf McLellan wants enough money to support himself and fulfil his travelling bucket list, while shielding his children from a big inheritance tax bill - Stuart Nicol

For a retiree, Wilf McLellan keeps busier than most. The 73-year-old accepted voluntary redundancy in 2021 after a career working in the oil and gas industry, settling down for a relaxed existence in his rural home north of Aberdeen.

Or so he thought. Even in his eighth decade, Mr McLellan works with a scouting organisation and a charity. His home requires “constant TLC” and last year he completed a 200-mile cycling tour across the Hebridean Way. “People ask me how my retirement’s going and I say, what retirement?” he jokes.

Mr McLellan’s wife passed away five years ago, but the pensioner is not lacking for company – his youngest son, 28, and his girlfriend live with Mr McLellan, as does a lodger. Between the latter and the yield from an apartment let out through Airbnb, Mr McLellan makes roughly £8,400 a year.

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Throughout his life, Mr McLellan has been a prudent saver. His pension pots and investments are myriad – and he earns a full state pension.

From 1985 he has been paying small amounts into two personal pensions: one with Prudential/M&G (formerly Scottish Amicable) and another with Phoenix (formerly Crusader) – both are on track to pay £24,000 and £11,500 a year respectively. He expects to take the latter pension in two years but is considering taking a tax-free lump sum and a lower income of £8,500 a year.

A third pot accrued when Mr Mclellan opted out of the additional state pension (otherwise known as Serps) – also with Prudential – is now worth £98,000. Finally, Mr McLellan has the option of taking a lesser pension plus a tax-free lump sum or cash transfer value from the defined benefits pension from his final employer.

However, he is unsure. “This DB scheme is not living up to its index-linked reputation and the company is in talks to divest the scheme to the market,” he says.

Pensions aside, Mr McLellan also earns roughly £2,000 a year from dividends from various company schemes – all of which are held in a vesting account. He also has £47,000 in a stocks and shares Isa and the maximum of £50,000 in premium bonds.

Inevitably, Mr McLellan is conscious that he will need enough money to support himself in his final years, while shielding his three children from a sizeable inheritance tax bill. “I still want to enjoy some ‘bucket-list’ travelling – possibly to New Zealand and Australia – but some consolidation tidying up is probably needed,” he says.

Emma Watson, head of financial planning at Rathbones Group

Mr McLellan already has a good amount of income in payment, at least some of which will be inflation-linked.  
Even before the Phoenix annuity comes into payment, his income looks like it will be just under £44,000 after Scottish income tax.

This will reduce slightly with the income tax changes due in the 2024/25 tax year, but should be plenty to cover his ongoing expenditure with a bit spare for his bucket list travelling.

It would be a good idea for him to keep track of his expenditure each year, as if he is able to establish a pattern of regular gifts from excess income, these would be immediately outside of his estate for inheritance tax purposes.

Having a good income in place already means that any further decisions to increase income at the expense of capital should be thought about carefully.

In respect of the Phoenix policy, this will depend on how good the guaranteed interest rate is. At age 75, the average male is expected to live for around 12 more years (based on ONS data), and once 42pc income tax is considered, this means the average person in his position would receive a net total of around £59,000 over their lifetime.

At the very least, taking the tax-free sum as Mr McLellan suggests, rather than the full income, might be a good idea. This could then be reinvested to target growth.

In respect of his other investments, the premium bonds are a sensible idea, and make a good rainy-day fund. If there is spare cash beyond these, then making an Isa contribution is likely to be a sensible strategy.

For the Prudential pension policy, taking out a fixed-term income plan feels like unnecessary complexity. This money is very unlikely to be needed in Mr McLellan’s lifetime, and so could be invested at a risk level that he is comfortable with to target growth and maximise the amount he passes on one day.

Investing like this will leave the money accessible should he need it, that said it would be subject to market volatility. I would expect a limited fund range within a policy like this, so some sort of managed fund may be worth considering.

For all assets that remain invested other than the premium bonds, it is important to think about diversification.

Mr McLellan mentions several single stocks, both from the employee share save scheme and some of the investments within his Isa, and it may be that a fund-based approach, whether trackers or actively managed funds, could offer a better way of structuring the portfolio.

Katherine Diamond, financial planner, Mazars

As Mr McLellan is unlikely to require the income from his Prudential/Phoenix plans, and pensions are outside of his estate for inheritance tax purposes, he should consider leaving the funds invested in a plan offering flexi-access drawdown.

From this, he can draw cash if it is needed, with any remaining funds passing to his beneficiaries free of inheritance tax. It is worth noting here that should he die after age 75, any income his beneficiaries receive will be taxed at their own marginal rates.

A balanced portfolio is a well-diversified portfolio that contains a mixture of asset classes and invests across different geographical locations and industries to help spread risk.

Mr McLellan’s share save stock doesn’t benefit from this diversification – if something goes wrong that affects the company or industry, the whole holding is at risk.

Mr McLellan also holds single Aim stocks, these too are higher risk and don’t offer a great deal of diversification.

The upside here is that Aim shares qualify for business relief and don’t attract inheritance tax. However, individual stocks aren’t the most diversified way to make the most of this relief, so he may wish to consider a more diversified alternative, with the relief retained if proceeds are invested in another business relief-qualifying investment.

Mr McLellan’s pensions and Isas grow tax-free, and winnings from his premium bonds are paid tax-free.

The dividend allowance is decreasing from £1,000 to £500 from April 6 (with rates determined by the UK bands), with the capital gains tax allowance decreasing from £6,000 to £3,000, meaning that it is increasingly beneficial for Mr McLellan to make use of his Isa and pension allowances.

Where his Aim shares are showing a loss, this can be offset against gains from elsewhere.

Mr McLellan should consider if he can benefit from rent-a-room relief. This could reduce his taxable income, however would be limited to £7,500 and property expenses can’t be set against the income, so the impact may be limited.

Mr McLellan, like many people, is concerned about inheritance tax but the nil rate band may mean this is unnecessary, depending on the values of cash or other investments he holds.

The nil rate band is £325,000 per person, with another £175,000 per person potentially available to Mr McLellan as a residence nil rate band (it should be noted that for estates exceeding £2,000,000 this tapers by £1 for every £2 excess).

As a widower, depending on the direction of his late spouse Will, he may have inherited their nil rate band. If this is the case, there could be £1,000,000 of allowances before any inheritance tax is payable.