BBC scheme caps life payouts at LTA as Webb slams ‘absurd’ death tax

Former pension minister Steve Webb is calling for death in service payouts to be made completely tax-free, as it has emerged that some employers are capping payouts entirely where the recipient would otherwise have exceeded the lifetime allowance.

Steve-Webb-pensions-minister-700.jpgThe BBC’s scheme caps death in service payouts so the member does not breach the £1m lifetime allowance, a scenario Webb, who is currently director of policy at Royal London, has described as a ‘100 per cent tax on death benefits’.

Webb is calling on the government to allow payouts from group life payments, sponsored by the employer, to be paid without contributing to the individual’s pension lifetime allowance. Under current rules payouts that take the individual over the £1m LTA are taxed at 55 per cent where benefits are held within a registered group life scheme.

Life assurance benefits held within an ‘excepted group life policy’ are understood as not counting towards the LTA, although if HMRC think that this method has been used purely to avoid tax then they could levy a tax charge in any case.

The BBC is one of a number of schemes that caps death benefits where they would take the individual over the LTA, effectively reducing death benefits for those with large amounts of pension savings. The BBC scheme rules say: “Lastly, the amount may be restricted to reflect the Member’s Lifetime Allowance. In certain circumstances it is possible for the cash sum to be eliminated completely.

“The resulting cash sum will be restricted to the balance of the Member’s Lifetime Allowance for both Actives and Pensioners”.

Royal London is calling for a change in the rules so that bereaved families do not have to deal with an unexpected tax shock.

Webb says: “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’.

“In some schemes the death in service benefits are capped to make sure the member does not exceed the £1m lifetime allowance. In effect this is a 100% ‘tax’ rate on lump sum benefits in excess of the LTA. This is an absurd situation and needs to be sorted out’.

“I don’t imagine that HMRC get a fortune from this, so my preference would be simply to say that society wants people to have life insurance, nobody wants or expects to die prematurely so it just seems unnecessary to tax people at all in these unhappy circumstances.”

Premier Financial Management director Trevor Jackson says: “The current rules are complex and unfair. If there has to be a lifetime allowance it should affect those who have contributed large amounts into their pension over a long period of time, not families where someone is unfortunate enough to die prematurely.”

Webb has published an extract of a letter from 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 payouts from the various pension plans have resulted in just under £173K 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 and to potentially 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.”