She could start one. Put £4k in one and the government will add 20%. So she could be getting an income of £480 a year from that and still have £4k. Could leave it all there until she needs it and it won't count towards Inheritance Tax until she is 70 (?)
I appreciate keeping the capital intact throughout the investment is an important point to yourself but it's of less concern to us. All of this discussion centres on whether or not my wife survives for three years but I'm hoping that works out!
The increased SP is worth £1300pa meaning the capital is returned in three years. If my wife lives a further 15 years she will receive £1300 x 15 =£19500 and the capital will be available after three years to invest elsewhere.
Using your example of £4000 invested + 20% tax relief (that figure is incorrect)** = £4800 @10% = £480. Over 18 years (no capital to repay) the additional income is £480 x 18 = £8640.
Using your numbers my wife would receive £10860 less than if she purchases additional SP years. In both examples the £4000 remains available. Agreed we are gambling on her living for three years but investing in a pension fund is equally a gamble. Yes, long-term the returns can be excellent, no argument, but over 18 years it would be realistic to experience two market "corrections" which could mean taking £480 is unwise - just look at 2020.
The SP route is a rock solid income, effectively backed by the state, of £1300. You won't find this anywhere else. IHT isn't an issue as we already have simple IHT planning in place to stay below the threshold.
** on this point the government doesn't add 20%. This is a common misconception and the numbers are tiny but can cause confusion. The £4000 invested is treated as income for tax purposes even if it comes from cash savings. For tax relief (20%) purposes it is presumed one had to earn £5000 gross to receive £4000 after tax. In your example the government would add £1000, not £800 as your calculation suggests.
I know, I did last week!
