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So a few weeks back, my dad died.
He had a pension from a previous employer which provides my mum with a widow's pension. They wrote to her last week asking her to choose one of two benefit options; either a nominal payment every month or a lump sum representing payment in full.
Now, it says the lump sum is subject to income tax. How's that work, anyone know how it's calculated?
[quote=Cougar said]
Now, it says the lump sum is subject to income tax. How's that work, anyone know how it's calculated?
Sorry to hear about that.
The pensionable income will treated as that i.e. income. So will get added to any other taxable income and after the personal allowance is deducted then the remaining amount will be taxed at the appropriate rate,
Thanks.
I'm no nearer though. Is it treated as an amount earned in a year, or a month, or what? If they're looking at is as they would a monthly wage payment then a massive chunk so going to disappear in the 40% tax bracket, no?
What pies said. Pensions are tax free on the way in i.e money paid in is always from your gross salary or 'uplifted' to your marginal rate if it is out of net income/adhoc payment but any income drawn from a pension, be it lump sum or monthly draw down etc is taxed as though it were salary. You are allowed 25% of your own pension as a tax free lump sum but I'm not sure how a widows pension is treated in this respect,
Edit on your comment - yes taking a big lump of pension in one go is hardly ever a good idea (unless of course it is needed in an emergency) as it is taxed at 40%
But your overall annual income should be calculated by HMRC and once they realise that the lump sum was a one-off and not a repeating monthly income then everything should rebalance and your mum would be due a tax refund.
It's a "trivial commutation" apparently.
So pulling figures out of the air, say she's awarded ten grand (that's not the value but it'll do for the sake of example), she might expect to see (handwave) six grand in practice, but then she'll get a couple of grand of that back as a tax rebate at financial year end?
TBH I'd go speak to a financial advisor, my old man is in a similar situation with a Navy pension awarded every month (and charged at 40%) on top of his existing salary. Solution - put it into another pension and get tax relief.
I know he's working so it's not entirely the same but there are always ways around this. New rules IIRC have made it a VERY unattractive option to take the lump as opposed to a few years ago.
New rules IIRC have made it a VERY unattractive option to take the lump as opposed to a few years ago.
Yeah, the added complication there is that my mum's not particularly well either. Taking the monthly payment may be the better long-term option under normal circumstances, however that assumes we're talking about long terms.
The letter actually recommends talking to an IFA. I don't even begin to know how to go about doing that or what it's likely to cost.
First question is how much is the lump sum they are offering and what's your mothers other income?
Also be aware your mum may recieve a letter from the dhss or whatever theyre called this week if your dad claimed any benefits or was in a care home being funded by the council.asking/telling you to pay money back.
2 of us off here had those letters.
Sorry to hear of your dads death, been there.Condolances
Ta.
Pretty sure we're not going to get any surprise demands. My dad was in a Don't Care Home for a couple of years, but it was funded by his own pension. Got the square root of **** all from the council as far as I'm aware.
We did get a final "while you were in hospital" bill from the home which was a bit of a kick in the puss, but that's all settled now.
taking a big lump of pension in one go is hardly ever a good idea (unless of course it is needed in an emergency) as it is taxed at 40%
Is it not the case this lump sum would be taxed as income. So if the OPs mpther's other annual income along with the lump sum is less than around 40K (Personal allowance plus 20% tax band) then it will be 20% tax on the lump sum?
Check the latest Autumn Statement because I think there was something in there about Osbourne removing the tax paid on a widow's pension.
It would be good if your Mum could delay the decision and wait until the law had changed and then not pay tax.
Edit - found an article on it.
I don't know how it works as a widow, but I got a "winding up lump sum / triviality payment" from a pension that had about 3 years of payments from when I was an apprentice. It was 25% tax free, and then the remainder heavily taxed (they assume worst case so 40% I think). Got an automatic partial rebate the following year (once they knew my actual earnings).
It would be good if your Mum could delay the decision and wait until the law had changed
Oh, now that's interesting. Presumably it'll be ratified for the new tax year; I wonder how long she can sit on it before replying...?
I assume your father was already retired ? If so he would have had a tax free lump sum already so the remaining benefits in term of monthly pension or lump sum would be taxable as income. As you note a lump sum is more likely to attract tax and at a higher rate than many years of the pension income. It's treated as a single payment in the tax year it's made
I'm not aware of any previous lump sums. He made it disappear sharpish if he did.
If they've classed it as a trivial commutation then the payment should be based on your moms notional rate of tax. If she has a low income and assuming the payout is relatively small then it should be no more than 20%.
The rules have changed substantially recently and you may be able to delay the death claim until next tax year (assuming your mom can survive without the income in the mean time) and she may then be able to take either the lump sum or income totally tax free. This will depend on the age of your dad though as he would have to have been under 75 at the date of death.
Things may also depend on the individual scheme he was in as although certain rules can apply, not all schemes allow them. I'm an IFA and you're welcome to PM me if you struggle to get any info.
I [i]think[/i] he was 74.
I can't PM you as the forum doesn't have such a thing, but I'll email you if that's ok? Very much appreciated, thank you (and thanks all).
Feel free to email me, no problem.
Whilst we are on pensions guys I worked for an engineering firm and payed into ta pension scheme for 8 years and was in the army for 5 years how when will I get any money that I have paid into these pensions can I draw out what i had paid in.
My dad's occup. pension simply seemed to transfer over to my mum when he died, few years back. Don't recall any letter offering option - maybe sum involved was different.
Condolences - such a lot to sort through.
As above, think probably best to speak to a recommended IFA - and consider wider implications - does, or will, your mum likely need increasing care or indeed re-housing? Set aside some for that? Or if sums involved are a bit bigger, she could take out an insurance policy, funded by the pension, to be written in trust to beneficiaries.. Assuming she doesn't need the cash of course :/