How in­sur­ers force wid­ows to pay tax on in­her­ited pen­sions

Re­forms were sup­posed to let in­her­ited funds pass down gen­er­a­tions, but some in­sur­ers don’t al­low it, says Sam Brod­beck

The Sunday Telegraph - Money & Business - - Front page - Tele­graph Money

Some of Bri­tain’s big­gest in­sur­ers are forc­ing wid­ows to cash in in­her­ited pen­sion sav­ings, dra­mat­i­cally in­creas­ing their tax li­a­bil­ity. As part of the pen­sion free­dom re­forms, the “death tax” on pen­sions was abol­ished in April 2015, mean­ing that un­spent pen­sions could be in­her­ited, and even passed on again to suc­ceed­ing gen­er­a­tions, in a highly tax-ef­fi­cient man­ner.

But some pen­sion com­pa­nies, in­clud­ing gi­ants Aviva and Re­as­sure, will pay the pen­sion of cer­tain de­ceased savers only as a cash lump sum, mean­ing that the money leaves the tax-ad­van­taged pen­sion “wrap­per”. As a re­sult, the per­son who in­her­its is likely to face taxes on fu­ture in­come and growth. Cru­cially, when he or she dies, the sav­ings pot will form part of their es­tate and po­ten­tially at­tract death du­ties.

Most firms will let wid­ows or wid­ow­ers buy an an­nu­ity with the pro­ceeds, but at to­day’s low rates that op­tion will be unattrac­tive to many. An­nu­ities also can­not be passed on through suc­ces­sive gen­er­a­tions.

reader Julie Bryant’s hus­band, John, died in Septem­ber 2016 just weeks after be­ing di­ag­nosed with liver cancer. He was only 63, mean­ing that Mrs Bryant could in­herit his pen­sions free of in­come tax. If he had died over the age of 75 any with­drawals she made would have been taxed at her mar­ginal rate. As the money was in­side the pen­sions at the point she in­her­ited them, she did not have to pay in­her­i­tance tax.

How­ever, the ma­jor­ity of Mr Bryant’s £612,000 of un­spent pen­sions was held by com­pa­nies that will pass the money on to Mrs Bryant only as a lump sum paid di­rectly to her. While she will re­ceive this money free of in­come tax, it will be out­side a pen­sion and so at risk of at­tract­ing other taxes as it grows. It will also form part of her own es­tate when she dies.

In all, Mr Bryant left six pen­sions with dif­fer­ent providers when he died. The ma­jor­ity of the money – nearly £370,000 – must be paid out as cash.

A fam­ily friend, Michael Veale, a solic­i­tor, has been fight­ing the pen­sion com­pa­nies on Mrs Bryant’s be­half. He has con­vinced Re­as­sure, a “closed book” in­surer, to re­verse its po­si­tion: it will now let her keep the £153,500 Re­as­sure pot in­side the pen­sion.

Mr Veale es­ti­mated that this would save Mrs Bryant around £116,000 in tax that she, and her es­tate, would have ended up hav­ing to pay if she had taken the cheque as per the orig­i­nal of­fer.

“I haven’t given up on be­half of Julie,” he said. “Her fi­nan­cial ad­viser failed but we suc­ceeded. Not ev­ery­one will have the blood­y­mind­ed­ness to do that. Most peo­ple don’t un­der­stand the rules, and would have given up.

“Un­less there is wider pub­lic aware­ness, these fi­nan­cial in­sti­tu­tions will keep think­ing they can walk all over their cus­tomers.”

Re­as­sure no longer takes on new cus­tomers, so it is not sur­pris­ing that it has not up­dated old-style poli­cies. Aviva, on the other hand, is one of Bri­tain’s largest providers, with more than 30 mil­lion cus­tomers. Yet it re­fuses to put Mrs Bryant’s in­her­ited pen­sion into a “draw­down” ac­count, as she wishes, or to let her move the money to a provider that will.

A spokesman said: “Un­der the terms of Mr Bryant’s pol­icy, ben­e­fi­cia­ries do not have the right to trans­fer this type of pen­sion, so al­ter­na­tive ar­range­ments can­not be made in this case. How­ever, Mrs Bryant can take the full pen­sion, £115,770, tax-free and in­vest the money else­where.”

Like­wise, a pen­sion fund of £99,000 built up while her hus­band worked for Mars can­not be trans­ferred out, the con­fec­tionery group con­firmed. It said: “If a scheme mem­ber passes away with funds still in our ar­range­ments, we pay those funds out un­der a dis­cre­tionary trust ar­range­ment, which min­imises in­her­i­tance tax to the es­tate.”

When the pen­sion free­dom rules came into force, providers were not com­pelled to of­fer all the new op­tions to savers. Most ma­jor firms have up­dated their more re­cent poli­cies but mil­lions of pounds still lan­guish in old, in­flex­i­ble pen­sion plans.

Mrs Bryant could put the money back into pen­sions, or Isas, but an­nual con­tri­bu­tion lim­its mean it would take her years, if not decades, to shel­ter all of her hus­band’s pen­sion money.

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