.edpension coupleFamilies can face a shock five-figured tax bills after the death of a loved one. Little-known rules regarding ‘death-in-service’ pay-outs from workplace pension schemes could result in grieving relatives facing huge tax bills.  Many businesses offer their staff a lump sum ‘death-in-service’ payment if a member of staff dies.  Sums of three or four times annual salary are the norm.

But what is rarely understood is that the value of this payment can count against the £1,055,000 (2019/20) ‘lifetime allowance’ limit for tax-relieved pension contributions. If the lifetime pension savings of the deceased person. Plus the value of the lump sum exceeds £1,055,000, income tax of 55% is due on any excess. In many cases, this will generate an unexpected tax bill which could run into tens of thousands of pounds.

Pension changes to the Lifetime Allowance.

The problem has become more acute since April 2016 with the reduction in the Lifetime Allowance (LTA) to £1 million. The Lifetime Allowance has been frozen at £1 million until 2018. Then it has only risen in line with inflation. It now stands at £1,055,000. Meaning that, as earnings grow, more and more people will potentially be dragged into a tax trap.

To make matters more complexed, only life assurance benefits with a particular legal structure being those written “under trust” within an approved pension scheme count towards the limit. Life assurance benefits from something called an ‘excepted group life policy’ appear not to be counted. Although if Her Majesty’s Revenue and Customs (HMRC) think that this method has been used purely to avoid tax then they can still levy a tax charge in any case.

What is the pensions industry saying?

Royal London is calling for a change in the rules. So that bereaved families do not have to deal with an unexpected tax shock. Royal London’s Director of Policy and ex-pensions minister Steve Webb said:

‘It is hard enough dealing with the loss of a loved one without having to face a huge tax bill as well.  It is ridiculous to say that someone who has died has saved ‘too much’ into a pension because they were unfortunate enough to die prematurely. In addition, the fact that some types of life cover count for tax and others apparently do not means that individuals do not know where they stand. The Government needs to review these rules as a matter of urgency to end the distress being experienced by bereaved families.  It is also important that employers ensure that workers are told if this issue could apply to them, and that employees ask searching questions of their pension scheme’.

A real-life example

Anstee & Co share the concerns over this issue which is highlighted in the following extracts from a letter sent to Steve Webb by a widowed member of the public who had recently been hit by an unexpected tax bill. Mrs B writes:

“I am a 59 year old widow. My husband died in February 2016 aged 51. He was diagnosed with cancer and was dead within 12 weeks.  The week before his death our adviser ascertained from his employer that the Death in Service Benefit should form part of his LTA. This was a complete shock to us.  As a result the Death in Service Benefit I received amounts to nearly 60% of his LTA.  The monies received plus the pay-outs from the various pension plans have resulted in just under £173,000 overshoot on the LTA.

My point is that the law was introduced to prevent very wealthy people from overfunding their pension plans. It seems very strange to me that I am being penalized for becoming a widow.  I am a volunteer for a charity and have no income stream of my own. My son is a student, whom I have to support to get through university. Whilst the payments may seem large when lumped together they need to be invested wisely to ensure I have an income for the rest of my life. This potentially needs to cover the costs of any care I may need later in life. It seems manifestly unfair that I and I’m sure others are treated in this way.”

How Anstee & Co can help you with your Pension.

To fully understand your existing pension arrangements and tax position why not book a meeting with us. The first meeting with our financial adviser is free of charge. It can be arranged at a time and location that is convenient for you.

Finally, we have offices in Kettering, Stamford and London. We also make use of meeting rooms in-

  • Northampton,
  • Wellingborough
  • Corby
  • Towcester
  • Warwick
  • Bedford