Inherited Pension as next of kin.

secretservice

I have recently been contacted by Canada Life (CL), informing me of a pension plan left to me by my father who unfortunately passed away in 1991.

I believe i am only being contacted now due to the recent passing of my mother.

I have given CL my National Insurance details and my birth certificate, they have informed me that i wont be able to redeem the plan until the age of 55 (i am 46 at present).

Can anyone advise me on whether or not this is standard?

xylophone

Can you say exactly what CL have told you about this pension?
Was your father paying into a pension on your behalf?

mania112

That is standard.

Husband will pass his pension (and everything else) to his Wife on death.

On the second death the pension is paid to the nominated beneficiary and if there isn't one it would obviously go to the next of kin.

Normal pension rules apply whereby you cannot take benefits until age 55.

EDIT: You can receive a cash sum, instead of leaving it in the pension. This will suffer an immediate 55% tax charge.

secretservice

Hi there, thanks for the replies. CL have only told me that the pension was paid up in August 1991 and given me the policy number and unit price.

I don't think he was paying into the pension on my behalf, he was a school janitor for over 20 years so i assume that he paid into it through his employer and that it has been passed onto me as next of kin.

Mania - does taking the cash sum effectively mean that i would be entitled to withdraw 45% of the total pension value before the age of 55?

Thanks again for taking the time to reply.

atush

AFAIK, yes that is the way ti works.

But before you do it, think VERY carefully. Esp if you have no (or a very small) pension yourself. You'd be throwing away 55% of what could be your future fund to live on. That may even help you retire earlier than you would normally be able to (a good thing if you come from a family with low LE)

jamesd

Be particularly careful if your thought is to use it to pay off mortgage borrowing before you reach 55. That'd be an extremely poor financial decision.

Clearing a mortgage from pension income or pension lump sum after 55 is perhaps the most efficient way there is to clear a mortgage, if you're the person who's been receiving the tax relief.

stinktankcynic

I thought pensions were outside of inheritance tax. So if someone who has a pension and dies young, the pension would be cashed out tax free to the people in a will or beneficiary? Are you saying the money is kept and paid out to the heir as if a pension they had paid for themselves? What's this 55% tax you mention? That's a rip off for someone who got 20% relief. Am I the only one who thinks the government is trying to increase pension contributions or take up in a world where pensions are becoming far less valuable?

Linton

stinktankcynic wrote: »

I thought pensions were outside of inheritance tax. So if someone who has a pension and dies young, the pension would be cashed out tax free to the people in a will or beneficiary? Are you saying the money is kept and paid out to the heir as if a pension they had paid for themselves? What's this 55% tax you mention? That's a rip off for someone who got 20% relief. Am I the only one who thinks the government is trying to increase pension contributions or take up in a world where pensions are becoming far less valuable?

The 55% tax comes from ensuring that pensions cannot be used as a tax avoidance scheme. It roughly corresponds to the tax that would be paid if the money had been moved from inside the pension into the estate and then paid out as a cash lump sum inheritance. So there is the 20% tax relief that needs to be paid back together with the 40% that would be charged if the estate paid inheritance tax - (1-0.2) * (1-0.4) = 0.48. 1 - 0.48 = 0.52 or if the deceased was a higher rate tax payer : (1-0.4)*(1-0.4)=0.36, 1-0.36=0.64.

The purpose of pension contributions is to provide a pension not as a mechanism to allow cash to flow from one generation to the next.

atush

And it does not apply of a spouse inherits the pension and keeps it as a pension and not a lump sum.

westy22

The 55% tax comes from ensuring that pensions cannot be used as a tax avoidance scheme. It roughly corresponds to the tax that would be paid if the money had been moved from inside the pension into the estate and then paid out as a cash lump sum inheritance. So there is the 20% tax relief that needs to be paid back together with the 40% that would be charged if the estate paid inheritance tax - (1-0.2) * (1-0.4) = 0.48. 1 - 0.48 = 0.52 or if the deceased was a higher rate tax payer : (1-0.4)*(1-0.4)=0.36, 1-0.36=0.64.

The purpose of pension contributions is to provide a pension not as a mechanism to allow cash to flow from one generation to the next.

I thought that the 55% tax charge only applied if the pension had been crystallized and that if the pension holder died with the pension uncrystallized, and was under 75 years old, that no tax charge applied.

mania112

westy22 wrote: »

I thought that the 55% tax charge only applied if the pension had been crystallized and that if the pension holder died with the pension uncrystallized, and was under 75 years old, that no tax charge applied.

Correct:

If you die before taking any benefits
If you die before taking any benefits, the death benefits are normally paid as a lump sum. This usually consists of the return of the pension fund together with the proceeds of any life assurance.
If the amount of the lump sum - plus the value of any other registered pension scheme benefits - exceeds the Lifetime Allowance (£1.5 million in tax year 2012-13) the excess is taxed at 55 per cent. The beneficiary has to pay this.
Death benefits can also be used to provide dependants' pensions instead of being taken as a lump sum. If a dependant's pension is provided this counts as taxable income for that dependant.

If you die after taking benefits
If you die after taking benefits, any death benefits payable as pension income to a dependant will be taxed as income in the normal way.
If the pension scheme provided for a lump sum payment this will be taxed at:
35 per cent for deaths before 6 April 2011
55 per cent for deaths after 5 April 2011
This is payable by the scheme administrator.


EDIT: Relating to the original question, my initial response was based on the assumption that pension was in payment, which may or may not be the case.

Interesting question this raise for me. If mother/father dies with a crystallised pension and leaves it to his son who is under 55 - are you 'forced' to suffer the 55% and take it as cash?

Can someone under 55 own a crystallised pension?