Little-known rules regarding ‘death-in-service’ payouts from workplace pension schemes could see grieving families hit by shock five-figure tax bills.
That’s according to Royal London which says millions of employees are at risk of exceeding the pension lifetime allowance because of their death-in-service benefits. As a result, it’s calling for a change in the rules.
Many company pension schemes offer workers’ families a lump sum ‘death-in-service’ payment of up to four times the employee’s annual salary if they die while employed by the firm.
But a little-known caveat of this payment is that it can count against the £1 million lifetime allowance limit for tax-relieved pension contributions.
For example, say you earn £100,000 and have death-in-service benefits worth four times your salary. If you die before you stop working, the £400,000 payment would count towards your lifetime allowance. If you already had more than £600,000 in your pension pot, your heirs would end up paying tax of 55 per cent on the excess.
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