Pension lump sum on death - Taxable?

MajorTom_2

Hi Guys,

Quick question,
My Father passed away last month and I have received a letter today stating that a lump sum from his private pension is due to be paid (total of £13,500). I believe this is because he was only drawing the pension for a total of 6 months (he was 65) before he passed away.

Would anyone know if this amount is taxable or if the amount provided by the pension company is after tax?

I am applying for probate at the moment and the amount will be made to whoever has the grant.
Being his only child I am beneficiary to all his estate however I am a higher rate tax payer so would I be liable for 40% tax on this or can I class it as inheritance? baring in mind he left no will.

Many Thanks,

MT

McKneff

Im not an expert but this amount would go into his estate and then passed to you. Its his inheritance to you.

I would have thought that the only tax you would pay on it would be any tax on interest once it goes into the bank.

And I;m so sorry you lost your dad, sad days eh.

holly_hobby

If there is no surviving spouse, and you are his only surviving issue, under intestacy regs you will inherit his whole estate.

There may be IHT due if the net value of estate exceeds 325k (and there is no tsf of un-used spousal relief available).

Hope this helps

Holly

MajorTom_2

Thanks for the fast response guys, I can confirm its well under £325k. £19k total with what he had in the bank minus £4k for his funeral and another debt still to be paid for £5k.

MT

newbutold

Pension lump sums normally fall outside the estate, as normally they are paid at the trustee's discretion. Your Dad may well of filled out an expression of wish form as to who he wishes any lump sum to be paid to & normally the trustee's will follow this but ultimately the can say who it gets paid to.

MajorTom_2

So if it falls outside of the estate then is it taxable? I don't think he filled out an expression of wish form hence the letter I received from the pension company stating the lump sum will be made out to whoever is named on the grant of probate.

MT

System

Have a look at http://www.pensionsadvisoryservice.org.uk/personal-and-stakeholder-pensions/stakeholder-pension-schemes/death-benefits

MajorTom_2

Right so according to that it is subject to 55% tax? Nice thanks Mr. Osbourne not only does my Father pay tax all his life you even tax him when he's dead!!!

Man I hate this country more and more!

MT

newbutold

Please take proper advise on this. However I wouldn't think it was taxable unless your Dad had used up his lifetime allowance. If he took a lump sum upon retirement, the paperwork would show what %of his allowance that lump used.

I am going off what happened when one of my parents died, so please do check it out with an expert.

xylophone

he was only drawing the pension for a total of 6 months

http://www.pensionsadvisoryservice.org.uk/personal-and-stakeholder-pensions/stakeholder-pension-schemes/death-benefits
"If 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."

Is this relevant to your case?

jamesd

newbutold, if he'd died before taking any benefits there would be no tax charge. There is after taking benefits.

MajorTom, consider:

• Higher rate tax payer pays in £80, gets £100 in their pension pot and a refund of £20, so £100 in the pot for net cost of £60.
• Pensioner takes £20 as a 25% tax free lump sum, now £80 left in the pot.
• Pensioner dies, after 55% tax charge there is £36 passed on.
• Total cost: £60. Total amount taken out: £56.

Now for a 45% tax payer using salary sacrifice:

• Top rate tax payer pays in £80, gets £100 in their pension pot and a refund of £25, so £100 in the pot for net cost of £55. Saved employee and all of the saved employer NI adds 15.8% to the pension pot, so £115.80.
• Pensioner takes £28.95 as a 25% tax free lump sum, now £86.85 left in the pot.
• Pensioner dies, after 55% tax charge there is £39.08 passed on.
• Total cost: £55. Total amount taken out: £68.03.

With higher tax rates and the possibility of salary sacrifice saving NI as well the charge is just about sufficient to recover the tax relief given in such cases and will fail to do that sometimes. The tax relief is given to provide an income in retirement so there's nothing inherently unjust about taking it back after death. The people who get the lump sum can put it into their own pensions and get their own tax relief if they want some of that withdrawn tax relief back.