What is the most tax efficient way to distribute a pension with an income after death

Enskatj

My mother recently passed away and left a pension with a guaranteed monthly income to the five beneficiaries in her will. The pension will continue to pay a monthly income for the next five years. I am one of the executors and I am looking at the best and most tax efficient way in spreading the monthly income. The pension income is taxed at source and Scottish widows are saying it must be paid to one of the beneficiaries. Is it as simple as paying the income to the beneficiary with the lowest tax code and then getting them to distribute the share to the others after tax? Are the others then liable to pay tax on the income received as it's already been taxed? Are there any other solutions worth considerin

xylophone

http://www.buckinghamgate.co.uk/abolition-of-pension-death-tax/

I am wondering whether it might be a better solution either for the executor's account be kept open for five years or for an account to be set up in the name of the executor as a bare trustee for the beneficiaries.

This would enable the whole pension to be drawn in the name of the Trustee and for the trustee to issue cheques and a tax certificate to each beneficiary.

Each beneficiary would then reclaim any overpaid tax, or declare his income so that additional tax could be paid if a higher rate tax payer?

https://www.gov.uk/government/publications/trusts-and-estates-certificate-of-deduction-of-income-tax-r185

Give HMRC Trusts and Estates a ring for guidance?

jamesd

SW are correct about how it should be paid but xylophone is probably correct about using the trustee.

Do remember one catch: like all pension money, this money is outside the estate. The will has no bearing on it and the executors have no control over it. It is purely up to the trustees of the pension firm who gets it. In practice the will can show desires of the deceased and the executors can help the trustees come to a solution that meet the needs of all involved.

If it was paid to one person it would be their taxable income and they would also have sole ownership of the money, leaving it exposed to their whims and possible creditors, their own death and will or their possible reliance on means tested benefits, where it would all count against he means test. No income tax would be payable by the other but because the receiver has paid income tax it would be necessary to deduct this cost from the amounts passed on, otherwise the first one getting the money would be paying income tax for the others, in effect.

If there are other assets in the estate an option is to use a deed of variation to have this income paid to one person and assets or money of comparable value paid to the others. Some allowance for the delayed receipt of the money is needed, based on investment or interest expectations, so the others would get less than 100% of the after tax value to make it fair. This has the advantages of not keeping the executor account open and being demonstrably fair and final for everyone involved. If one person objects they can be offered the option of having the income if they prefer.