My son will inherit my £135k pension but must take it as a lump sum: How can we avoid a tax hit?

I have a stakeholder pension, taken out with a major insurer but now administered by another company, which I built up from my and my employer’s payments totaling £51,000 from 2004 to 2014 when I retired.

It remains fully invested and spread across eight funds.

Now 74 years old, I haven’t had to touch the pot that has grown to £135,000. I am in excellent health and have sufficient other possessions and I doubt that I will need the money collected.

I have named my son as a beneficiary. My son is 45 years old and a high earner and taxpayer, with an income of over £100,000 a year.

I’m reviewing my will and I’ve contacted my pension company to ask if I should include the pension pot in my will (apparently it’s not really essential, but I could if I wanted to) and, in the inevitable event of my death, how they would arrange the transfer of the pension to my son so that he could take it.

I was aware of the rule allowing a pension to be passed on tax free if the holder is under 75 years old at death, but assuming I don’t run for speeding buses in the coming months I expect this won’t apply are here.

I was shocked to be told that the entire pension pot would be paid to my son in one lump sum upon my death and I wondered if they had made a mistake.

Today I received a letter with the following clarification: ‘Since there is no flexi-access available for this product, the customer’s pension cannot be passed on to the beneficiaries through any dependent or nominee or successor of flexi-access.’

They then said: ‘The above amount will be paid out in one lump sum in the event of an unexpected death.’

If the sum of £135,000 is paid to my son in a lump sum, would he have to pay a one-off income tax assessment which would put him in the top tax rate? Is there any way to mitigate this?

Would it be wise if I transfer the entire pot to a Sipp that I already have with another provider where it can be pulled out flexibly. I have checked and this provider can offer my son the option to take out the loan on my death, unlike the option which is not available with the current company.

This all seems a bit messy and if there is a major income tax hit, as I fear, from such a large payout then presumably many other people could fall into the same trap and only find out (the beneficiaries anyway ) after death.

In my opinion, this should be pointed out to everyone who has such a pension policy.

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Steve Webb replies: The short answer is that your careful planning could have saved your son from a very large tax bill.

As you know, the tax rules on what happens to pension money when we die have changed in recent years.

As far as inheritance tax is concerned, the situation remains that pensions are generally not counted as part of your estate.

In most cases, there is therefore no inheritance tax on the money that remains in a pension.

It is therefore very important to tell your pension scheme or administrator who you want to use, but it is not necessary to state the pension in your will.

Even if you do state your pension in your will, the pension provider is not automatically obliged to follow those instructions.

The tax at issue here is income tax, specifically how the person who benefits from your pension pot will be taxed.

As you point out, the new rules say that if you died before the age of 75, the recipient(s) of your pension pot would pay no income tax on that money.

This would be true whether they get it all out right away or use it up gradually over a much longer period of time.

But if you pass on a retirement pot after a death of age 75 or older, the money will be added to their income by your beneficiaries, along with their other taxable income.

Very sensibly, you have investigated whether the money in your pension can be passed on in the form of a ‘withdrawal account’.

This is a pot of money from which your son can draw at will, and only pay taxes when he takes the money out.

However, keep in mind that while you can take 25 percent tax-free, it doesn’t apply to your beneficiaries, so you may want to factor this into your financial planning.

Spreading withdrawals over a longer period of time (if he chooses to do so) will likely make your son pay less in taxes overall, especially if he were to withdraw some of the money later in life, when he may no longer a higher taxpayer rate.,

However, you have been told by your administrator that this choice is not possible with the pension type you have with them.

This probably means that the provider’s systems simply don’t allow it.

Some providers may tell you that while they can’t withdraw your money right away, they can do it “in an instant” through another product and then withdraw. But your provider does not do this.

So, without further action on your part, you’re right that your son would probably just receive a large amount of cash and possibly pay 40 percent (and more) of that in taxes.

Given what you’ve said about your plans and what you’re trying to achieve, you should definitely explore whether you can better achieve these goals by having your retirement somewhere else.

Your experience is a warning to all of us not to make assumptions and ask questions to our pension administrator or pension scheme.

It can often be impossible to sort out these matters after someone has passed away (and it’s not something a grieving family wants to focus on), so it’s definitely something you can do for your family to put things right now. to get.

I am grateful to Clare Moffat, specialist in pensions and legal affairs at Royal London, for her input into this column

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