2nd May 2019

Prudential: Did you know…?

When inheriting pension death benefits could be better planned. Jacqueline Clezy, Technical Manager at Prudential goes into more detail. 

The scenario 

Mark has total taxable income of £200,000 (including £100,000 he has taken as an ad-hoc payment from a nominee’s drawdown plan set up from taxable pension death benefits) and an employer pension contribution of £40,000.  He is affected by the tapered annual allowance.  His threshold income is £200,000 so breaches the limit of £110,000. His adjusted income is £240,000 so breaches the limit of £150,000.  At this point he starts to lose £1 of standard annual allowance for every £2 his adjusted income exceeds £150,000, but there is no reduction below £10,000. This leaves Mark with the minimum tapered annual allowance of £10,000.

He has no available carry forward, so this means he has an AA excess of £30,000 and would need to pay a 45% tax charge ie £13,500. This is based on UK rates of tax and the charge would be higher if he lived in Scotland.

Bearing in mind the £100,000 taxable pension death benefits will already have been subject to income tax at Mark’s marginal rate, and caused the loss of his personal allowance, this is a further blow to the value of Mark’s, already depleted, inheritance.

Now, if he knew he wanted to take a lump sum, things could have been so much different.  When calculating the threshold and adjusted income figures for the tapered annual allowance, the last stage of those calculations allows you to deduct any taxable lump sum pension death benefits paid directly from the pension scheme settling death benefits.

To read the full article and other articles in this edition of Oracle, click here. 

Pensions