S226/RAC pensions tax bombshell at age 75

mathus

My Father in law died on his 75th birthday, leaving an S226 pension to pay a lump sum to his widow.

However, as he didn't have it set up to pay into a trust, and he died having turned 75, it was paid to his estate, rather than to his widow. As a result the lump sum was stung with a non recoverable 45% tax bombshell.This made my elderly disabled and newly widowed mother in law substantially poorer

Up to 1988 these pensions were sold to self employed people, who didn't benefit from workplace pensions. So loads of trades people, truckers etc. I am sure that there are many who will not have had the advice to ensure these schemes pay any death benefits into a trust for their widows/widowers.

Apparently, according to the pensions provider, this tax on the widows of self employed people was quietly put in place by the current conservative government in 2016.

Many working class people who paid into these pensions will now be comming up to their 75th birthday and have no idea whether their S226 pension  is set up to pay into a trust or not.

Is there anyway we can recover this tax?

If not how can we make sure others are not stung in the same way?

Marcon

mathus said:

My Father in law died on his 75th birthday, leaving an S226 pension to pay a lump sum to his widow.

However, as he didn't have it set up to pay into a trust, and he died having turned 75, it was paid to his estate, rather than to his widow. As a result the lump sum was stung with a non recoverable 45% tax bombshell.This made my elderly disabled and newly widowed mother in law substantially poorer

Up to 1988 these pensions were sold to self employed people, who didn't benefit from workplace pensions. So loads of trades people, truckers etc. I am sure that there are many who will not have had the advice to ensure these schemes pay any death benefits into a trust for their widows/widowers.

Apparently, according to the pensions provider, this tax on the widows of self employed people was quietly put in place by the current conservative government in 2016.

Many working class people who paid into these pensions will now be comming up to their 75th birthday and have no idea whether their S226 pension  is set up to pay into a trust or not.

Is there anyway we can recover this tax?

If not how can we make sure others are not stung in the same way?

Ouch - that must have been more than unwelcome.

A lump sum death benefit from such a contract paid between 6 April 2015 and 5 April 2016 would have been subject to the special lump sum death benefit (SLSDB) tax charge of 45%. From 6 April 2016, when a taxable lump sum death benefit is paid directly to an individual, this is liable to income tax at the marginal rate for the beneficiary. 

Where the lump sum death benefit is paid to a 'non-individual' (in this case the personal representatives) I'm afraid the SLSDB tax charge of 45% still applies and cannot be reclaimed. 

From 6 April 1980, it became possible to put the proceeds of a RAC in trust on death, rather than (as previously) only being payable to the estate. Given these forerunners of personal pensions are now relatively uncommon (no new contracts could be taken out from 1988), it would be extremely helpful for the providers of existing contracts to ensure their customers are made aware of what is likely to be a little-known, or at least much-overlooked, fact. 

Maybe an approach to someone like Paul Lewis on Radio 4's Moneybox programme would be an excellent way to publicise this, and also encourage the product providers to publicise the issue to their customers? I'm afraid it won't help your mother in law, but it may well be enormously valuable to others. https://www.bbc.co.uk/programmes/articles/1M8DssCcgjtZQlwLCrLBmpM/contact-money-box

dunstonh

Apparently, according to the pensions provider, this tax on the widows of self employed people was quietly put in place by the current conservative government in 2016.

It was not quiet, and the changes only increased flexibility and tweaked existing taxation rules put in place in 2006 under Labour.   Before 2016, your father would have been required to buy an annuity before 75.  The loss would probably have been much greater in that case.

In this case, the provider would have been writing to him for about 3-5 years before 75, telling him that he had to do something, and it would have laid out the options they could offer.   Did he have the mental capacity to read and understand instructions or was someone else doing that for him?  It won't make any difference to the outcome but it may explain why nothing was done.

Many working class people who paid into these pensions will now be comming up to their 75th birthday and have no idea whether their S226 pension  is set up to pay into a trust or not.

a) most S226s cannot be held past age 74 and providers will go out of their way to get people to either commence them or transfer them before then.  It causes all sorts of tax issues if held beyond their 75th birthday and an administration nightmare that can break legacy systems requiring expensive manual inputting.
b) a trust is not required. It is one way but it is usually the least optimal way to solve the issue.
c) the problem goes away with a transfer to a modern plan.

Is there anyway we can recover this tax?<br>

No.

If not how can we make sure others are not stung in the same way?
a) tell them to read their documentation when it is sent to them.  
b) tell them to transfer to a modern plan that allows benefits to be held past age 75 (such as SIPP/PPP)
c) their adviser should be taking care of this if they have one.