Widows pension. Tax payable

lexington013

My Dad passed away recently leaving a small widows pension.
£1100 yearly. Having contacted Dads old company they have advised us that they will be making a lump sum payment of 21k rather than the yearly pension of £1100. I haven't seen the correspondence mum has received from them.
Regarding tax, I'm aware of the 11.5k threshold but how will this affect the one off payment of 21k into mums account?
In terms of Inheritance tax mum is well below the limit to pay anything as I have reviewed this.
Mum has some ISAs that are tax free and some small savings accounts that provide less than the £1000 interest free savings threshold.

macman

This wouldn't come under IHT anyway as it's paid direct to the widow and so not part of the estate. She will be taxed on the income in that tax year that is above her personal allowance. Normally you can only take 25% tax free as a lump sum.
I think that you need to see the paperwork before you do anything else.

agarnett

Hi lexington013.

It sounds like it is an old Defined Benefit pension scheme, or "Final Salary scheme". They are like gold dust now. It's an interesting treatment that the Trustees(?) have given in using discretion in deciding what's best for your Mum. I appreciate you are worried now about tax liability of such a lump sum receipt, but what they've done could in fact be good news, and perhaps was always intended by them to be so.

Incidentally, how old is your Mum? Average life expectancy is up to around 90 now for those in their third age with average health (but non-smokers I guess).

Perhaps your Dad did not take any tax free lump sum when he started drawing his pension? If so, that could have given the Trustees opportunity now to offer a tax free sum because it had never before been taken?

If you see my own good news thread today, you'll see my relative was in the same boat recently, but luckily her husband had earned 27 years service in the scheme so his pension (and now his widow's) were paying a bit more than £1,100 pa, so perhaps the suggestion of converting the widow's pension to a lump sum never arose.

In the case I mentioned, her husband had taken the 25% tax free lump sum at the beginning when he first retired, accepting a reduced pension, and no lump sum has been offered to his widow, but there was a different silver lining!

Someone will no doubt be along and give a more informed opinion, but I would like to think that what they have offered your Mum might well be tax free.

There's no reason why you shouldn't contact the pension scheme yourself and ask them a gentle general question about whether it might be tax free so you can advise your Mum not to worry. They can answer general questions without breaching DPA and they may use their discretion to help you in alittle more detail as far as they dare especially if your Mum is elderly.

lexington013

Hi, yes just read your post after posting mine and it made interesting reading. I don't believe my father took a tax free lump sum but I will ask the question. Yes it as a FS scheme. I'm thankful that my Sainsburys scheme is FS (although deferred) and will provide a comfortable retirement. Dad was very focussed on me joining the pension scheme when I was 18!
I will let you,know how I get on.
Thanks for the above replies.:beer:

lexington013

agarnett wrote: »

Hi lexington013.

It sounds like it is an old Defined Benefit pension scheme, or "Final Salary scheme". They are like gold dust now. It's an interesting treatment that the Trustees(?) have given in using discretion in deciding what's best for your Mum. I appreciate you are worried now about tax liability of such a lump sum receipt, but what they've done could in fact be good news, and perhaps was always intended by them to be so.

Incidentally, how old is your Mum? Average life expectancy is up to around 90 now for those in their third age with average health (but non-smokers I guess).

Perhaps your Dad did not take any tax free lump sum when he started drawing his pension? If so, that could have given the Trustees opportunity now to offer a tax free sum because it had never before been taken?

If you see my own good news thread today, you'll see my relative was in the same boat recently, but luckily her husband had earned 27 years service in the scheme so his pension (and now his widow's) were paying a bit more than £1,100 pa, so perhaps the suggestion of converting the widow's pension to a lump sum never arose.

In the case I mentioned, her husband had taken the 25% tax free lump sum at the beginning when he first retired, accepting a reduced pension, and no lump sum has been offered to his widow, but there was a different silver lining!

Someone will no doubt be along and give a more informed opinion, but I would like to think that what they have offered your Mum might well be tax free.

There's no reason why you shouldn't contact the pension scheme yourself and ask them a gentle general question about whether it might be tax free so you can advise your Mum not to worry. They can answer general questions without breaching DPA and they may use their discretion to help you in alittle more detail as far as they dare especially if your Mum is elderly.

Mum is 80 years of age.

xylophone

Normally you can only take 25% tax free as a lump sum.

See Death benefits: taking small dependant’s
pensions as a lump sum





https://www.pensionsadvisoryservice.org.uk/content/spotlights-files/uploads/Death_benefits_commutation_SPOT014_V1.3.pdf

How is a trivial commutation lump sum death benefit taxed?
The whole lump sum is taxable as if it was part of your income. The pension scheme administrator should deduct the tax from the lump sum payment before it is paid to you.


OP, have you checked the situation regarding your mother's state pension entitlement now that she has been widowed?

Check the tax situation re any overpayment of tax.

agarnett

As usual, xylophone takes us right to the heart of the matter!

I note two sentences in the Pension Advisory Service article which might be exploitable/bendable at the discretion of the scheme trustees:

1. The payment "must extinguish all your rights to death benefits under the scheme"
2. "There is no time limit for making the payment"

Pension schemes make occasional mistakes in payment. That got me wondering whether this proposed payment could be delayed until end March 2018 and a mistake could be made accidentally on purpose to pay half before 6th April tax year start date and the correction amount soon after 6th April 2018 when the mistake gets noticed.

Or would that be unlawful tax evasion? Perish that thought all you Tories like Cameron looking for all the family inheritance tax wheezes they like to share amongst themselves