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Bereavement - Tax/ pension

Kerryco
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Joined: June 27th, 2021, 3:20 pm

Bereavement - Tax/ pension

#422877

Postby Kerryco » June 27th, 2021, 3:46 pm

Hello

Relative lost his partner of 40 years a few months ago, she did everything for him and I've been helping him in sorting out general things banks bills pensions etc, he's 66 earning £52k PA and is now receiving £400 month from partners main pension and being offered £22k trivial lump sum from another (£17,000 after paye tax deduction? ) I've looked up income tax rates and wondering will he end up paying higher rate on this monthly pension, wondering to avoid this could he put more into his own pension or he said he could go self employed, he is working long hours so could reduce these although being at work is helping him at the moment, any thoughts/advice much appreciated.

Thank You

ursaminortaur
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Re: Bereavement - Tax/ pension

#422900

Postby ursaminortaur » June 27th, 2021, 5:06 pm

Kerryco wrote:Hello

Relative lost his partner of 40 years a few months ago, she did everything for him and I've been helping him in sorting out general things banks bills pensions etc, he's 66 earning £52k PA and is now receiving £400 month from partners main pension and being offered £22k trivial lump sum from another (£17,000 after paye tax deduction? ) I've looked up income tax rates and wondering will he end up paying higher rate on this monthly pension, wondering to avoid this could he put more into his own pension or he said he could go self employed, he is working long hours so could reduce these although being at work is helping him at the moment, any thoughts/advice much appreciated.

Thank You


Unfortunately although income taken from an inherited DC pension where the pension owner had died before age 75 can be taken free of income tax that isn't the case with DB pensions payments.

https://www.unbiased.co.uk/life/pensions-retirement/pensions-and-inheritance

Pension pots are not subject to inheritance tax when you die. If you die before the age of 75, the person(s) who inherit your pension pot can draw on the money as they wish, without paying any income tax either. However, if you are 75 or over when you die, a beneficiary of your pension pot will have to pay income tax on any withdrawals at their marginal rate (i.e. the highest rate of income tax that they pay).

If your beneficiary is entitled to continue receiving payments from an annuity or defined benefit pension after your death, then these payments will be subject to income tax at their marginal rate.


The trivial commutation lump sum death benefit is also unfortunately taxable

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm073700#IDAMUMMB

The whole lump sum is taxable as pension income of the dependant or individual entitled to receive it. The pension scheme administrator must apply PAYE to the lump sum payment before paying the lump sum.

As the payments are taxable as pension income the rate of tax is the lump sum recipient’s marginal rate of tax for the tax year in which the lump sum is paid. So, if the individual is a basic rate taxpayer, the rate is basic rate and if the individual is a higher rate taxpayer the rate is the higher rate applying to the individual.

Where the lump sum payment is in respect of a pension already in payment to the dependant or individual, the PAYE code already in operation should be used.

Where the pension being commuted was not already in payment to the dependant or individual, the basic rate (BR) tax code should be used.


So yes it looks like he will have to pay higher rate income tax on these payments. He might as you say be able to reduce this to basic rate by paying more into his own pension but whether that is worth doing will depend upon how close he is to the LTA limit on his own pensions - paying a 55% LTA excess charge later to save now may not make sense.

genou
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Re: Bereavement - Tax/ pension

#422901

Postby genou » June 27th, 2021, 5:07 pm

Kerryco wrote:Hello

Relative lost his partner of 40 years a few months ago, she did everything for him and I've been helping him in sorting out general things banks bills pensions etc, he's 66 earning £52k PA and is now receiving £400 month from partners main pension and being offered £22k trivial lump sum from another (£17,000 after paye tax deduction? ) I've looked up income tax rates and wondering will he end up paying higher rate on this monthly pension, wondering to avoid this could he put more into his own pension or he said he could go self employed, he is working long hours so could reduce these although being at work is helping him at the moment, any thoughts/advice much appreciated.

Thank You


His own income would take him into higher rate by itself, so I assume his pension contributions are keeping him at 20%. If his pension is DC, simplest thing to do ( if he doesn't want any cash ) is to increase his regular pension contributions to take the pension in payment out of tax and then make a one-off payment into his pension to move the 22k payment into it. His maximum pension contribution in the year is 40k less any employer contributions, which should probably cover both things. The arithmetic is simple enough to confirm. If it is not, he can use carried forward allowance from the previous 3 years, and on your numbers that is definitely going to allow him to remove any higher rate liability.

If he has a Defined Benefit pension he can increase his contributions to match the pension in payment. He might be able to move the 22k into it, but he'd need to check if it is allowed and, crucially, what it would buy him. It might easily be worth opening a SIPP to take the 22k. The arithmetic here is harder, since it is about expected returns.

I see there is another post while I was typing. Good advice on the LTA, if he has a DC pension.

Adamski
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Re: Bereavement - Tax/ pension

#422904

Postby Adamski » June 27th, 2021, 5:30 pm

Sorry to hear you lost a relative. Yes sounds like he will have to pay higher rate.

If he doesn't do a tax return may be ok with automatic tax deductions.

However with multiple pensions *may* get drawn into SA tax return if hmrc think he's paid too little tax. One to bear in mind, my parent needs help with tax return each year.

Kerryco
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Re: Bereavement - Tax/ pension

#422919

Postby Kerryco » June 27th, 2021, 6:27 pm

Thank you all,

very useful information and taken me a large step forward in understanding things, I forgot to mention that he also received a lump sum on first pension along with the £400 monthly pension payments think around £30k. He has only been in a pension himself for last few years so LTA not really going to be an issue. I will check what sort of employer pension it is, but think its auto enrollment (DC?)

So think probably put money in his pension especially monies in higher band and he can draw that when he retires at lower tax rate 20%

Will we be able trivial lump sum transferred into his pension without them deducting the PAYE first?

Thanks again all


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