Serious ill health retirement lump sum

SWALLOW

Hello

I am in need of some information regarding a pension serious ill health lump sum my husband has been offered

To give some back ground he has been diagnosed terminal and has spent the last year in hospitals. We have lived off the insurance that covered his salary for illness for the year which is now coming to an end so he has been offered early retirement pension options.

Which are
Equal to a 20% reduction in salary
And a small spousal pension and a lump sum of 4 x his final salary on his passing.

Equal to a 50% reduction in salary and a lump sump
And a small spousal pension and a lump sum of 4 x his final salary on his passing.

A final payment lump sum which would end his claim on any further claim to the pension pot and his employment.

We were told that this final amount would be paid tax free and I think that I took that to mean it was tax free but does it just means that they don't pay any tax due and that is down to us?
If so does anyone have any clear figures on the actual tax percentage payments due on such lump sums?

We are looking to go for this as it would allow the mortgage to be cleared and repairs (extensive) to the property as well as his loan and credit to be cleared rather than the potential of struggling in his last few months and possibly going through some kind of debt program. The other amounts offered would not give this.

Also if you are a widow getting a company pension does it stop you from claiming the states widow pension?

As you can see I know nothing about pensions and in desperate need of advice.

jamesd

There is no tax to pay on serious ill health lump sums unless the total value of the lump sum and all other pension lump sums received is greater than the pension lifetime allowance, which is currently £1.25 million. Please say if it's anywhere close to that and someone can explain more about what happens to amounts above that. So probably no tax to pay at all. No income tax, inheritance tax, capital gains tax or anything else unless that £1.25 million is reached.

The £1.25 million applies to all pension pots being taken in the past, now or in the future for him.

jamesd

What type of pension is this?

If it is a personal pension or a work defined contribution pension, the rest of this post does not apply. Defined contributions are where the company pays a certain amount into a pension each month and there's no undertaking to pay 1/80th or some other portion of salary at the end.

It appears that it may be a defined benefit pension, like final salary or average salary. If so, it's possible that it may be better to transfer the pension to a personal pension instead of taking any of the three offers. The reason is that often defined benefit pensions have death benefits that are lower than the transfer value of the pension. If that is so, then it pays to take the transfer value instead and transfer to a personal pension.

A personal pension also has a completely tax free serious ill health lump sum available, equal to the whole value transferred less some usually modest costs. Same £1.25 million before tax situation.

So the thing to do is ask the pension people at the pension place what the transfer value is and compare that to the lump sum only value. If the transfer value is higher you'd need to find an Independent Financial Adviser to carry out the transfer because it is standard practice to have mandatory requirements for an IFA to sign off on such transfers. That requirement exists because such transfers are usually a bad idea, something that does not apply in your circumstances. Some IFAs will still prefer not to have the business but that's just their business preference. If you don't know any IFAs they can be found via unbiased.co.uk. Before looking for one, give say Hargreaves Lansdown a call and ask them whether they will accept a transfer for a serious ill health lump sum without IFA sign-off.

jamesd

Widow's pensions have been replaced by bereavement allowance which is paid for 52 weeks to those aged 45 or over only and only until they reach state pension age. It isn't means tested, so savings and pensions do not affect it.

SWALLOW

Hello Jamesd and thank you so much for replying to my post.
The amount is under a million in total. So it sounds like tax would not apply which is good to know.

SWALLOW

Hi James, I do not know for certain if it is work based or personal I will have to check the documentation. I am so grateful to get this help. I will contact the pension people and find out which is the greater sum and see if a transfer would be better value.

SWALLOW

Thank you again for the update on bereavement allowance I just want to make sure I get the right information for us both.


thank you again

kidmugsy

jamesd, am I right in my understanding that if the husband dies having already made the transfer to a personal pension, and under age 75, and if he has nominated his widow on his "expression of wishes" form, then on his death the personal pension can be transferred to her and she can withdraw money from it at her preferred rate, tax-free?

jamesd

kidmugsy, yes, you are right about that, thanks for mentioning it. Even if he didn't nominate her in an expression of wishes form the trustees would probably decide to pay it to her and it'd still be tax free.