To think 55% tax on death pension is really bad?

[salsmum]

Please note I'm not against paying tax per-say and both myself and my late husband have worked and payed tax all our lives. My husband worked for a very well known supermarket for 20 yrs + and had a life insurance, he was not classed as a 'high earner'. Although we've had some difficult times in our marriage financially but he was always assured that upon death myself and our 2 children would be provided for.... He sadly passed away unexpectedly mid jan aged 56 his insurance and pension have come through and I was and sad and to see that if the money is paid in a lump sum it's taxed at the rate of 55%. I feel that the pension plan my late husband was in had led him to believe with the promise of £££ lump sum after death, is far from the true amount they actually pay....AIBU to feel sad that my children ( 23, 28) will not benefit as much as my husband wished after his sad death? and think this is too much to take from a family in need? My son gets wed in April and this pension would have been a treat from his father that he couldn't afford in life? (please be gentle with me we only cremated him on Thurs) xx

[Lovelygoldboots]

Glad you have sorted this out salsmum but on you behalf that you have been so messed about. I am so sorry about your husband.

[salsmum]

Just a quick update in regards to my earlier post....SL sent a letter to me today stating there had been an error! gingerly I rang them to be told they had made a mistake on my late hubs pension and it was a PERSONAL PENSION which is tax free....although his insurance is still 55% taxable the pension is not. I would like to say that I'm happy but of course when your children come 'into money' under these circumstances 'happy' is not an appropriate word to use but it'll be reassuring to know that our children will have the savings that their father was not able to give them in life IYKWIM? in truth though we would obviously rather have him walk through the door again . Thank you for all your help,advice and sympathy xx

[Loopyhasanotherbean]

I am an IFA and if your husband had an income drawdown fund, then they are quite correct in saying there is a 55% tax if you choose to have it paid as a lump sum to you. (Not that it will be of much consolation but it used to be 65% until the government changed it a few years back).

You don't have to have it paid out though. You could have the full fund value transferred into a drawdown policy in your own name, and the money could remain invested, with you drawing a lump sum down each year from the invested capital. This would be liable for income tax depending on what other income you have and the income will fluctuate over time but on your death thr remaining fund could then be passed to your children, but there would still be the 55% tax at this point. If you don't like the investment risk and the risk of the income fallling then you could use the fund to buy an annuity which will give you a guaranteed income for life. Again this income would be liable for income tax, which will be a lower rate than the 55%. But if you need or want the fund as a cash lump sum then I'm afraid there is no way of avoiding that tax. And when your husband drew his benefits there is no way he wouldn't have known this, but it was and still is a very popular thing for people to draw their tax free cash and then put their funds into drawdown.

[mrsmalcolmreynolds]

Ok - if it really is a crystallised drawdown pension that means that you DH would have had to designate the funds as available for drawdown. He would not necessarily have had to take any money out, but the usual reason for doing this would be either to start taking an income or to take out a tax free cag sum of up to 25% and then leave the rest to fund income at a later time. If they say he did that, ask them to produce a copy of the paperwork.

Really sorry this is adding to the stress of an already awful time.

[salsmum]

TDOSANC,
I think the answer to those 2 questions is no but they are ringing me tomo to talk things over ...they have to leave it 24 hours before ringing back...When I asked if there could be any more pensions that I'm unaware of they advised me to ring all his employers.

[TheDoctrineOfSciAndNatureClub]

Does that mean your DH drew down a lump sum in the last year?

Do you know if he took advice on this matter after he turned 55?

[salsmum]

Just to say I rang the SL today and they've told me it is a 'Crystalised' draw down pension which is taxable at 55% . It seems they are right.

[KnightRob]

Is it possible that the pension was an Income Drawdown plan whereby some/all of the available tax-free cash (pension commencement lump sum) had already been withdrawn, even if no income has been taken?
If so, tax could be charged at 55% if the remainder of the fund is paid as a lump sum.

[Pendeen]

"If you die before age 75 and the lump sum death benefit is paid within two years of the reported death, the lump sum can generally be paid without any tax charge."

from //www.pensionsadvisoryservice.org.uk

OP I am v sorry for your loss but something odd here as regards tax - you need to check again..

[mrsmalcolmreynolds]

Hi - I work in pensions (although not an IFA) and just to echo what GooseyLoosey says, it is only in quite unusual circumstances that a lump sum paid out on death would be subject to any tax at all, let alone 55%.

Insurance companies/pension providers' communications can be clear as mud sometimes and they may have mentioned the 55% in connection with one of these unusual scenarios, rather than the normal way things would work. You should phone them up and ask, and I'd specifically say ask them to confirm what sort of lump sum it is within the tax rules (eg. is it an uncrystallised funds benefits lump sum death benefit like GooseyLoosey mentioned) and why the 55% is being imposed - this sounds like something called a "lifetime allowance charge" which would only apply if benefits taken out overall were of a value over £1.5m.

[GooseyLoosey]

Should add I am not a tax adviser or an IFA so don't know all there is to know about this - my comments were just to give you sufficient info to talk to the provider.

[GooseyLoosey]

I would ask SL to explain how the tax charge arises.

The tax position depends on the type of lump sum paid, what kind of scheme he was in and the age of your husband at death as, as others have said, whether your husband's total pension pot exceeds £1.5m.

You say your husband was 56 and because you refer to Scottish Life as the provider, I am guessing this was a personal pension. The only question left is what kind of lump sum it is. There are various technical kinds defined in tax legislation and they are all treated quite differently.

If the lump sum is an "annuity protection lump sum" (which might be the case if your husband had already used his pension fund to buy an annuity), the rate of tax is 55%. However, if your husband was not receiving any benefits at the date this type of lump sum may not be relevant.

Where no benefits were in payment from the policy, the lump sum payable would usually be a "uncrystallised funds benefits lump sum death benefit". This is taxed at 55% if the member was over age 75. However, where the member is below that age, the lump sum should be tax free (unless the £1.5m point is relevant).

You should go back to SL and ask for more details and if they still say tax is due, consider taking your own advice if you are not happy with what they say.

[Lovelygoldboots]

Give them a ring and see what allowance is. They should have put it on quote. I have had problems with Scottish widows myself with mistakes on my policies. Get them to send you a revised quote. Honest to god when people are bereaved they should take more care and look at personal circumstances xxx

[WowOoo]

Sorry. That read wrongly.
I meant to say is there an alternative to the lump sum, thereby not having to pay the 55%. ?

[salsmum]

Lgb you sound fine x wowooo that IS the lump sum tax deduction of 55%. x

[WowOoo]

salsmum, sorry to hear you lost your husband at such a young age.

Could you not get a lump sum and then not have to pay such a hefty tax bill?

It's truly shocking. I'm not a tax expert. Please talk to a professional about this.
You'll have to pay for their services, but surely it would be worth it.

[Lovelygoldboots]

Hi salsmum. I am going to sound very matter of fact now so do forgive me. It appears from the link that if you take the lump sum, as your husband was under 75 then some of the lump sum should be tax free. Check that allowance has been included. There may be other more beneficial options for you. Long time since I studied tax but get some rust free advice

[salsmum]

Thank you all so much for your help and condolences the info was sent to me by his pension providers (Scottish Life) and the 55% taxable lump sum option was quoted in writing by them. xx

[TheDoctrineOfSciAndNatureClub]

Try again

[TheDoctrineOfSciAndNatureClub]

This link might be helpful:
www.pensionsadvisoryservice.org.uk/occupational_pensions/death_benefits

Sorry for your loss.

[sydlexic]

I am so sorry for your loss.

There are a lot of tax insentives when paying into a pension and people could use that to make a significant profit on their investment. So the schemes are designed to dissuade people from taking large lump sums. You could probably take 25% of the money tax free, depending on the type of scheme. You do need to get advise from a professional.

[CabbageLeaves]

Salsmum. So sorry for your loss. This sort of situation just makes it all worse I agree 55% is steep and second those saying its worth getting advice

[LaurieFairyCake]

Very sorry for your loss, he was really young

I would get some money advice if I were you if it should have been tax free up to 1.5 million - I'm fairly sure you wouldn't be complaining about it if you got 1.5 million as that's a fortune.

[valiumredhead]

Sorry for your loss x

Yeah it's shit, isn't it?