Pension & Tax Advice

titusbungle

Hoping someone can help?

My Dad is really ill, under palliative care and is worrying about Mum and finances once the worst happens....

He has been registered disabled for a number of years, Mum has been his carer throughout.

He had a pension that he has cashed in (for want of a better word maybe?). It was for just over £25,000, the letter that he received said that it had been taxed on an emergency tax code and he received just over £15,000 as a lump sum (it was around £9700 tax)

Couple of questions....
- is that the correct amount of tax paid?
- if not how can he get the difference back?
- if he isn't here at the end of the tax year, is Mum entitled to it?

Thanks to anyone that can help!

Linton

The tax paid represents the effect of the emergency code. Your Dad can get a refund before the end of the tax year- see here for what seems to be a rather clearer explanation than on the hmrc website.

If he isnt around when the tax is refunded it will go into his estate and be distributed according to his will.

jamesd

I'm puzzled. Why did they deduct any tax at all? A person with a life expectancy of less than a year can take a personal pension pot as a "serious ill health lump sum" tax free. All of it, not just the usual 25%. Can be a few million Pounds tax free if that's what's in the pension pot.

Did he tell the firm that he had a life expectancy of less than a year and wanted a serious ill health lump sum or did he just take it using the pension flexibility rules that only give a 25% tax free lump sum? If he wasn't explicit about that, did he say anything that should have given them a clue that he was likely to die soon? Anything at all that might make it a possible mistake on their part to not at least ask?

I'm not sure that it's now possible to correct this unless he told them and they made a mistake and treated it as a normal lump sum.

One thing he can do is make normal pension contributions up to the usual limits (up to 40k but no more than earned income, or 3600 gross if that is more). Then he can take that out again as a serious ill health lump sum, 100% tax free. This is assuming that he's younger than 75 and eligible to make pension contributions still. That'd be a way to get back some of the tax, via the usual pension contribution tax relief.

If money isn't taken out and he's under 75 the money is inherited as a tax free lump sum. So there's no rush to get it out if he was to make more contributions. Assuming the money is from a personal pension that's what would have happened if he hadn't taken it out.

He should first try to see whether there's any way to get the money as a serious ill health lump sum. If that fails, then yes, the amount deducted was the correct amount to be deducted but it was way more than the actual tax bill because emergency code deductions. A refund claim can be made online via his Personal Tax Account. HMRC's target processing time is 60 days.