Tax on private pension left to spouse

Nc01nw

Hi Guys
My father died 3 years ago.  Both parents were pensioners at the time (both over 65) and dad was in receipt of a private pension which he had contributed to all of his working life.  On his death, 50% of his pension was passed to mum.  However, HMRC then took 40% of it.  So, with that 40% deduction, the amount she receives is £135 per month.    Aside from state pension, Mum claims no benefits at all, and since his death she has received a letter every year with a bill from HMRC.  In the 2018/2019 year it was £360, in the 2019/2020 year it is £160.  Her financial circumstances have not changed since dads death.  I understand that she is taxed on personal income, but given that HMRC have already taken 40% anyway, is it correct that the £135 in a contributor to her personal income?  Also, despite many attempts at speaking to HMRC, i am at a loss to understand why the annual bill value changes, when there are no changes to her financial situation.  Any help to explain this would be welcomed - thanks in advance

Dox

How old was your dad when he died - crucially, under or over 75? Was your mum a higher rate taxpayer at the time of his death - seems unlikely, from the rest of your post?

Marcon

Nc01nw said:

Hi Guys
My father died 3 years ago.  Both parents were pensioners at the time (both over 65) and dad was in receipt of a private pension which he had contributed to all of his working life.  On his death, 50% of his pension was passed to mum.  However, HMRC then took 40% of it.  So, with that 40% deduction, the amount she receives is £135 per month.    Aside from state pension, Mum claims no benefits at all, and since his death she has received a letter every year with a bill from HMRC.  In the 2018/2019 year it was £360, in the 2019/2020 year it is £160.  Her financial circumstances have not changed since dads death.  I understand that she is taxed on personal income, but given that HMRC have already taken 40% anyway, is it correct that the £135 in a contributor to her personal income?  Also, despite many attempts at speaking to HMRC, i am at a loss to understand why the annual bill value changes, when there are no changes to her financial situation.  Any help to explain this would be welcomed - thanks in advance

What's your mum's tax code?

Flugelhorn

sounds like she is being taxed too much on that - may all shake down if she did a tax return

xylophone

What kind of pension did your father have?

You mention that your mother was a pensioner aged over 65 when you father died.

Was she receiving at least a full basic state pension in her own right before your father died?

What was the situation in respect of inheritance of your father's state pension?

Does she have any private pension provision of her own?

Is she in receipt of dividend or savings income from non ISA accounts?

Does she have to submit a tax return?

Nc01nw

Dox said:

How old was your dad when he died - crucially, under or over 75? Was your mum a higher rate taxpayer at the time of his death - seems unlikely, from the rest of your post? Dad was 74 when he died, mum was on basic state pension at the time

What's your mum's tax code? 1250L 

xylophone said:

What kind of pension did your father have?
The Pension is through a company called Just Retirement & Partnership and its an Annuity Pension (is all i get get out of mum) and they have confirmed that the tax code for the 10% mum receives is NT and so she isn't paying tax on that 10%.  We already know that HMRC have already taken 40%, this was confirmed in a letter shortly after his death.  His pension was his estate, no home or any other income that would be classed as inheritance.   
You mention that your mother was a pensioner aged over 65 when you father died - she was 68
Was she receiving at least a full basic state pension in her own right before your father died? basic state pension
What was the situation in respect of inheritance of your father's state pension? Mum is in receipt of a small amount of dads state pension
Does she have any private pension provision of her own? No
Is she in receipt of dividend or savings income from non ISA accounts? No other income or benefits
Does she have to submit a tax return? No

xylophone

You indicate that (apart from the annuity), your mother's only income is her state pension.
Do you know exactly how much she receives?

xylophone

Another thought

We already know that HMRC have already taken 40%, this was confirmed in a letter shortly after his death.  

Have you seen this letter? It might throw some light.

sheramber

 If your mother is  in receipt of state pension her code number should not be 1250L. There should be restriction of her personal allowance to cover the state pension. 
That would be why she has underpaid tax.

Linton

Someone is very confused. If the ongoing payment is simply a survivors annuity the pension was not "left to her", it is her pension in her own right.  It is taxed under PAYE simply as another income stream. Also the pension was not part of your father's estate, pensions aren't.

We really need to know the contents of the HMRC letter.

I am trying to think of circumstances whereby an inherited pension could be subject to an initial tax of 40%.  The best that I can come up with is that:
1) Your father's pension was held as a lump sum in drawdown rather than taken as an annuity.    The remains of the lump sum would be passed to your mother (but why only 50%?).
2) As your father was under 75 when he died, now under normal circumstances the pension would be passed tax free and would not be taxed when in payment to your mother.  However if he had started drawing down prior to April 2015 the money would be taxable when paid out.
3) If your mother then withdrew the whole lot as a single lump sum she would almost certainly be liable to 40% tax on some of the money.
4) If she then used the taxed lump sum to buy an annuity most of it would be tax free as it would be a return of her own money, but part would be taxable.  Could this be the 10% you mention?

Possibly there could be a similar set of circumstances with a DB pension with a lump sum death benefit.  Was your father's pension Defined Contribution or Defined Benefit ("final salary", "CARE" or similar)?

If my theory is correct and your mother acted with financial advice she could have reason to complain as it would be an extremely poor way of managing one's finances.  But without more information this is all complete guesswork.

xylophone

Another oddity - the OP's mother is said to have only two sources of income, the state pension and the "spouse" pension which is said to be coded NT - the OP also states that her mother's tax code is 1250L - but where is she seeing this code? The state pension is paid gross and has no code.