How to best deal with a death benefit received.

Phlox987

My father passed away a year ago. His wife has redirected some of his pension fund to me - worth £100,000. I would have to pay 40% income tax if I draw it all - or even more if I take it in a lump sum. I am trying to work out how to get the best out of it and need help. I can't afford to leave it for my own pension as we have a heavy mortgage and I'm already in my late 40s.

My current thought is to redirect £9K to each of my two children into kids' ISAs this year and next, which they can have when aged 18 to help with further education. This would be tax free as it's under the personal allowance. So that's £36K safe.

I thought then that I draw out the remaining £64K and divide it between me husband and me... we'll have to pay 40% tax but I can't find a way out of that. We'd end up with £38K after paying the income tax on it. 

Is there any other way of paying less tax but accessing the money over the next 2-3 years? (can't wait longer than that...).

Thanks!

Nebulous2

How old was he? Is it still in a pension? 

xylophone

His wife has redirected some of his pension fund to me 

Your late father was aged over 75 when he died? He had nominated his widow as the sole beneficiary of his pension?

The widow asked the pension provider to exercise their discretion in your favour?

https://www.gov.uk/tax-on-pension-death-benefits

How do you propose redirecting part of the pension to your children?

Phlox987

Nebulous2 said:

How old was he? Is it still in a pension? 

He was 78 so after the 'magic age' as one IFA called it. 

Malthusian

I can't afford to leave it for my own pension as we have a heavy mortgage and I'm already in my late 40s.

My current thought is to redirect £9K to each of my two children into kids' ISAs this year and next

That doesn't compute. You need the money urgently to reduce your debt, so urgently you are willing to pay extra tax on it, but you are going to give £36,000 away to your children? Either the debt is crippling enough that it has to be repaid as far as possible at any cost, or it's manageable enough that you can afford to give £36,000 of the windfall away.

Has the pension provider said they are willing to redirect the death benefits a second time from you to your children / husband? They may insist on it being paid to you (and therefore taxable in your name), especially if they were not named on your father's expression of wish.

For the money to be taxable in your children's names the pension provider needs to assign the death benefits to them now. If they assign them to you, they will be taxable in your name on withdrawal until you die. 

For the money to be taxed across future tax years it needs to be transferred to a "nominee flexi access drawdown plan", which means the money is only taxed when it is taken out of the pension. Some providers allow this option, others don't, and even if the provider redirects the death benefits to the children / spouse, they may not have the option to use nominee drawdown if they were not named on the expression of wish.

Your children should be taking the maximum student loan they can as to do otherwise is highly likely to be voluntary tax. If you are going to subsidise their studies on top of that, fair enough.