Unexpected Pension Pot

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Hello.

My lovely dad had been contacted by an old pension provider to advise him he has £50K in a pot that needs action before early March. He was unaware of this until now.

He doesn’t especially need this money but might like to keep up to £10K for a rainy day. He would like to claim it in one lump sum, which after tax would be somewhat reduced (not sure how much tax he will pay??)

The rest he would like to gift between his three children.

Can anyone advise what is possible to make the most of the unexpected money? I’ve read that it would be subject to inheritance tax if he passed away within 7 years? Would there be any tax to pay on the “gifts” otherwise?

In all honesty we don’t think he has more than a few years left - he’s in rather ill health with various complex conditions.

Thanks for any advice.

Assuming this is a defined contribution scheme and the terminology suggests it is Pension Wise would be a good starting point for advice on how to deal with actual encashement@

https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise

If you then want help with IHT etc planning - though he's need a lot more than £50k for that to be an issue - then you'll need a Financial Adviser. PLeanty about but some of the bigger ones are not good value.

Thank you.

yes it was a workplace pension.

he receives benefits, housing allowance and disability allowance. Would this amount be likely to affect those?

thank you for the link that is very helpful

If he has capital, which a pension pot would be, it would affect benefits like Pension Credit and Housing Benefit/Council Tax Reduction.

I'd expect Pension Wise to be able to cover how that would impact.

If he's receiving various benefits that suggests he has minimal savings and therefore needn't worry about IHT (unless he has an expensive house). There's no other tax on gifts.

He can probably withdraw 25% tax free, and the rest will be taxed according to his income tax code. Depending on his other income he may be best taking some this financial year and some next, rather than in a single lump that could put him over a tax band threshold.

Why does the pension provider say it needs action (and what action) by March?

Does he have any other private pension?

Can't he just start drawing down from this newly discovered pension? What action do they say needs to be taken?

A Pension is not normally considered to be part of his estate when he dies, so not affected by IHT. And he can make his family the beneficiaries of the pension so that it could pass to them after his death.

If he has any benefits that are means tested he could lose them if he cashes this pension in and keeps it as savings. Whereas if he cashes it in and gives away the money it could be seen as 'deprivation of assets' and he could lose means tested benefits anyway. A pension pot isn't generally treated as 'savings' for means tested savings threshold.

So in his shoes I think I would make sure that I had named the three children as beneficiaries, and then draw down on it to the extent that it improves his quality of life a bit - after all, it's his pension!

IHT is only an issue if he has more than £325k to leave. Or £500k if his estate includes his home left to his direct descendants. And if he was married and your Mum has already died he inherits her IHT threshold - so up to £650k or £1m if a house is included!

So unless he has anything like that I wouldn't be paying for IHT advice. He won't be eligible to pay.

Is any of his benefits means tested? If they are it is not as simple as drawing on it now. You may need advice.

https://www.citizensadvice.org.uk/debt-and-money/pensions/nearing-retirement/what-you-can-do-with-your-pension-pot/#:~:text=If%20you%20already%20get%20means,affect%20your%20entitlement%20to%20benefits.

Thanks everyone.

he has no property (has been in social housing for more than fifteen years). He has no savings. Just has £5K left in another pot that he had been drawing down on for the last ten years. So this

he is on various benefits, including disability and attendant’s allowance

I think I’m minded to agree that he should leave most of it there, perhaps take a tax free lump now, and then draw down the rest each financial year as long as he lives… in the case that he passed away within a year or two and had named us three children as beneficiaries, am I right in thinking it wouldn’t be subject to any tax?

That is what I would advise although it only matters if he is on means tested benefits which AA is not. Not sure about the disability ones. You need to find out first then get the threshold numbers and see if they apply to his circumstances. TBH I’m not sure that’s why you need to speak to someone who knows about benefits and pensions maybe Age UK?

Op I'd suggest talking to a benefits adviser, if he has housing allowance (housing benefit) then any lump sum payments could affect it, indeed any payments as they are income and housing benefit is means tested. You need to find out how this will be affected by each option. Him gifting any of a lump sum to family would likely be seen as depriving himself of capital and he would be treated as if he still had it, which could mean he'd lose his benefits.

How old is your dad?

He can get 25 percent tax free. Then he could look at his current income and draw it down in different tax years so some before end of March some later in April so he doesn't have to pay 40 percent tax dependant upon how much income he already has each year.

He is 76 next week, which is why they’ve tracked him down as the plan isn’t designed to go beyond 75. He has to do something with it! current provider doesn’t offer annuities or flexible drawdown options on this plan. He could look to transfer it, but under the current provider it seems that taking the whole pot is the only option.

his only income is benefits (housing/attendants/council tax etc) and state pension.

If he takes 25% tax free before 5/4 can he take another 25% tax free on 6/4 ? Not sure if that's allowed ? If he's got 50% left it will be taxed at 40% when he draws it down and could be 12 months before he gets a tax rebate. This will reduce the pot he has in savings but he'll still be above the savings limit for benefits. Surely he then gives up his benefits temporarily until the pot has been used to live on ? And then he claims again ? Or is this too simplistic ?

Are you 100% sure this isn't a scam? Similar happened to my dad a while back. He was contacted by an old provider that he barely remembered having, but they had quite a bit of information about him, so seemed genuine.

He had several conversations with them and then they told him he would need to pay them to release the money. He started to get suspicious and pushed back a bit and they ended the call and he never heard from them again.

This may not be the same, but good to be aware that there are scams like this about the place.

I am currently doing exams in this area.... let me tell you what I know.

Having a private pension pot won't affect your father's benefits, if he's not yet drawing from it. However If he takes an income or a lump sum from the pension, then this may affect his means tested payments (ie Housing Benefit). Note Attendance Allowance is not means tested. The critical sum here is £6k in assets before his means tested benefits (housing benefit) are scaled back/removed.

As a priority, you need to transfer the pot to a new SIPP provider if it can't stay where it is. There are loads available - Hargreaves Lansdown are good for example. Then he should ensure that he nominates the beneficiaries to his pot in the event of his passing - this is different from his will. Invest the pot in something sensible near term....

He is entitled to a 25% tax free lump sum (ie £12.5k).... however taking more than £6k will scale back his housing benefit. Taking £16k would result in him losing it all together. Any amount he subsequently takes as pension income will be added to his state pension for tax computation purposes. Then any taxable income amount above his personal allowance will be taxable at 20% (note his attendance allowing and housing benefit will not be treated as taxable income).

The absolutely wrong thing to do would be to take the whole pot now and distribute it to his family. This will incur significant tax charges AND be seen as deliberate deprivation of assets to enable him to retain his housing benefit.

For someone in your dad’s position an annuity would have been good, however, considering his age and health you have to weigh up the pros and cons.

If he takes 25% tax free before 5/4 can he take another 25% tax free on 6/4 ? Not sure if that's allowed ?

No. It's not a per-year allowance.

25% of the total can be taken tax free. That calculation of 25% is only made once. You can then take all the tax free bit as 1 lump, or by taking 25% of every withdrawal as tax free. But you don't get an additional allowance each year.

Was he really not aware of this before? If he has been getting means tested benefits for years when he had a lump sum available to him then I guess in theory he could owe some back ? And giving money away in this situation is likely to be seen as deprivation of capital so is not advisable. Also there's no point just not taking the pension - if you have a private pension available to you then you are expected to take it. Attendance Allowance is non means tested but housing benefit and council tax support and pension credit ( if he gets this ) are means tested. If he had taken this pension years ago then it could be that he was never entitled to means tested benefits?

It could be a scam.

I’d be wary of it being a scam, keep a close eye on what they are saying and red flags if they ask for payment for anything.

I think this is good advice - it's absolutely true that with pensions you need to do something with them at age 75, so this absolutely could be real.

BUT if it is a pension you should NEVER need to pay any money to access it. If he gets any requests like "send us £200 processing fee to set up the pension" or similar then he should report that straight to the pensions regulator and not pay anything.