Business & Investment

Cousin fends off pension tax traps and receives an apology from Fidelity

Inheriting part of the pension pot: Erie Lacy, 19, 19 years old, taken with her father Peter

Four grandchildren escaped from a high tax trap after admitting that financial giant Fidelity had made a mistake in the inherited pension pot.

The company misrepresented that it had launched a lesser-known tax system that would severely limit its ability to save its pensions in the future.

Ellie Lacy, 19, (pictured to the right with her father Peter), her brother and two cousins ​​in their early twenties each receive about £ 1,300 from a pension set by their deceased grandfather. It was.

People who start using pensions can only get £ 4,000 a year into the retirement fund and will continue to be tax deductible.

This rule is permanently triggered after receiving an amount in excess of the 25% lump sum tax exemption, so it usually applies to people over the age of 55 who are just starting to earn income from their pension.

The £ 4,000 annual savings limit aims to prevent people from “recycling” into the pension system and returning withdrawals and getting additional tax deductions from the government.

If you save more than this amount-known in financial terms as “annual money purchase allowance” or MPAA- Tax will be charged.

For young adults, such strict limits on savings and the huge potential loss of pension tax deductions will have a disastrous impact on their ability to build pensions during their future work life.

And in this case, it was incorrectly applied by Fidelity to the grandchildren who inherited the pension.

What is a pension tax cut?

This tax cut allows anyone to save from tax-exempt income for retirement.

Government replenishment to your pension is based on the income tax rate of 20 percent, 40 percent or 45 percent of people. This means that the more you earn and pay taxes, the more money you will receive. Please check this out for details.

Ellie is a student in commerce and her younger brother James, 21, is a mechanical and electrical apprentice engineer.

Their cousins ​​are physics student Joe Harrow, 21, and customer service assistant Bethany Harrow, 26.

After they received the payment from the pension, they received a letter from Fidelity that everything but Bethany caused the MPAA.

Worried Peter Lacy realized that it could have devastating economic consequences for children, nieces and nephews, and turned to money pension columnist Steve Webb for advice.

A software engineer in Colchester, Essex, said it would be “harsh” to confiscate a huge amount of future duty-free pension contributions, just receiving £ 1,363 each from his deceased grandparents.

‘Is this the correct answer? ‘He asked. “If so, is it certain that the warning should have been issued before, not after the payment was made?”

The grandfather of his four cousins, Terence Hello, died in 2019 at the age of 77, but in his later years he set up an independent pension pot with Fidelity, especially for his grandchildren.

Margaret, a former teacher who died about a month ago at the age of 78, also created a pension fund of the same size as Fidelity. This will also be inherited by her grandchildren.

When I asked Fidelity to investigate, I quickly realized that an error had occurred.

The company confirmed that it had made the same mistakes in other cases, acknowledged the concerns that the situation caused them, and said it would pay £ 100 each to its four cousins.

A Fidelity spokesperson said: ‘Thank you for emphasizing Lacy’s concerns about the letter Harlow’s grandson received about the MPAA trigger.

“These letters were certainly sent incorrectly-the totals received by each of Terence Hello’s grandchildren did not cause the MPAA, and they need to take no action in notifying the HMRC. There is none.

“We are dealing with this by apologizing to our family. They will receive a letter next week to correct the situation.

‘Each letter contains contact details for a designated member of Fidelity’s Client Services team. This member can discuss further questions from the family.

“Check to see if other cases may have occurred and contact the affected beneficiaries.

“I hope this helps in addressing the questions I received from Lacey. If you have any further questions, please let me know.

Rules designed to prevent a few people from abusing the tax deduction system have caused complications for thousands of people.

Former MPAA Pension Minister Steve Webb

“As mentioned earlier, our client service team can discuss the questions that families have when solving problems.

“Acknowledging the concerns caused by this situation, I would like to offer £ 100 to each of my four grandchildren. This will be confirmed in the letter they received and will be arranged as soon as possible.

Former Pension Minister Steve Webb, who is currently a partner of pension consultant LCP, said: ‘The experience of this family shows the absurd complexity of these tax laws if even the pension companies themselves do not understand how they work.

“Rules designed to prevent a few people from abusing the tax deduction system can cause complications for thousands of people and can be a barrier for those who want to build up their pensions.

“HMRC needs to think very seriously about whether this rule is really needed.”

Money filed a proceeding with Hello and Lacy’s family with the Treasury, seeking comment on Webb’s statement regarding the MPAA, but had not received a response by the time it was published.

It was not uncommon for the late Mr. and Mrs. Hello to establish a self-invested personal pension, or Sipps, for their grandchildren after the tax system for inheritance of pensions was eased in 2015.

Claire Moffat:

Claire Moffat: “I’m seeing more and more people pass their pensions to wider families.”

55% tax rate applied to drawdown pension pots left to people if the owner dies It was abandoned.

Instead, the beneficiary pays no tax if the owner dies before the age of 75 and the normal income tax rate if the owner dies above the age of 75. Click here for details About inheritance of pension.

Clare Moffat, Head of Development and Technology at Royal London, said: “We are increasingly seeing people pass their pensions to wider families and take advantage of beneficiary drawdowns.

“In terms of inheritance tax, and potentially income tax, it is incredibly tax efficient.

“In addition to this, the appeal is clear because there is no age limit for beneficiaries to withdraw money like the original owner and they can take as much as they want.

“But, as this case shows, it’s a complex area, and families will deal with it during great post-mortem stress of their loved ones.

“Getting advice will ensure that you can overcome potential pitfalls.”

Top SIPPS for DIY Pension Investors

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Cousin fends off pension tax traps and receives an apology from Fidelity

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