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

[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Income Drawdown plan whereby some/all of the available tax-free cash (pension commencement lump sum) had already been withdrawn, even if no income has been taken?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.

[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.

[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]

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.

[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.

[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.

[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

[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.