Tax on pension pot

[Pensiontaxman]

Sadly my brother’s wife died after a long illness. As this was terminal she retired due to ill health and one of her two pensions paid out before her passing. It paid out cash. I believe around £200k.

My brother still works and earn around £45k. He has now spent most of this pension pot in cash, house renovations, clearing wife’s debts (which were significant and a whole other story) and money to children to get them on the housing ladder (ie their deposits, around 50k each)

As I understand it pension pots, or 80% of them, needed to be converted into a pension by purchasing an annuity. Spend it as cash and you are subject to tax on the lot - which will be considerable and would be at the upper rate.

He assures me he won’t pay tax as an accountant mate says its ok.

Who is right? Will be get a surprise tax bill?

Thanks

Was his wife under 75? If so, he’s right - no tax.

But even if she wasn’t there’s no longer an annuity requirement.

How old is he?

I very much doubt he will be taxed

this was inheritance

he is the spouse

so not IHT

Assuming the wife was under 75, he's right - no income tax payable.

They weren’t just his wife’s debts
His too

I’ll take a punt your relationship with him isn’t great

Both 60.

One pension paid out before death - so is this still inheritance?

I just worry about a big tax bill. He’s had a lifetime of being crap with money.

No, its fine.

Though being more financially cautious, not having had financial disasters in my life sometimes have to tone down the big sister advice.

He's right. If she died, aged less than 75, it's tax free, regardless of any other estate.

As others have posted, the requirement to purchase an annuity was dropped - around 10 years ago I think. Furthermore, if you have a life expectancy of less than 12 months you can often take pension benefits early, including taking the whole lot as a lump sum. And anyone with their own DC fund can pass that on death to whoever they like and, if they're under 75, that’s tax free too. Though, the recipient is taxed on subsequent income from it. Or they can just spend it. You seem awfully invested in your brother’s financial affairs though, I have to say…

edited to also add, assuming they were married, then transfers between spouses on death are IHT free anyway.

If one pension paid out on grounds of ill health before she died then it would form part of her estate for IHT purposes. Debts should have been paid out of her estate and the residual funds transferred to her husband (assuming there was a will?). This may have used part of her IHT nil rate band and any remaining NRB can be used by her husband on death.

The pension that was paid after death is not liable to income tax but would now form part of the husband's estate for IHT purposes. But that's irrelevant if he has spent it all.

He’s 60 and still on a very healthy salary

he can’t be that bad

Her illness was terminal
and so paid out
treated differently

And the way he has spent the money seems very very sensible to me

house deposits for his children
clearing debts
home improvement

"You seem awfully invested in your brother’s financial affairs though, I have to say…"

There is an awful lot more (involving others) - but didn't need including.

Not a chance you’re concerned about your bro op

he spent the money very wisely

he is on a good salary

and you are quoting rules from a decade ago