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Widow battles trustees over £700,000 in pension tax

A widow has gone into battle with a UK pension scheme over a £700,000 tax bill that lawyers and financial experts said was unnecessary for her to pay.

Clare Chalmers, 61, is taking the trustees of Citibank (UK) pension plan to the pensions ombudsman, claiming it distributed her late husband’s pension fund in an “unsympathetic” and “incoherent” way.

The case highlights the uneven take-up by pension scheme trustees of new powers designed to give their members more choice on how their benefits are taken.

Mrs Chalmers and her two daughters were beneficiaries of a pension built up by Alan, her late husband, after working for Citibank, part of the US headquartered Citigroup, for nearly four decades.

Before his death in 2021 at the age of 64, Mr Chalmers had worked in a number of senior roles with the multinational group, accumulating a defined contribution pension fund of around £4.15mn.

Pension funds that remain after the death of a member can typically be distributed to beneficiaries as a lump sum, an income or an annuity, and are subject to tax, at different rates, on sums over the lifetime allowance (LTA), currently £1.073mn.

Of the £4.15mn due to pass to Mrs Chalmers and her daughters, £1.8mn was protected from LTA tax charge, leaving £2.3mn exposed to charges ranging from 25 per cent to 55 per cent, depending on how the benefits were paid.

The trustees had proposed to pay Mr Chalmers’ fund as a lump sum, thereby attracting a 55 per cent tax rate and triggering a tax bill of nearly £1.3mn.

David Penney, a chartered financial planner at Penney, Ruddy & Winter, who advised Mrs Chalmers on the proposed payment, suggested to the trustees that there were other options which would not lead to the death benefits being “significantly penalised” by tax charges.

One of those options was a spouse’s pension, a type of defined benefit scheme. Ideally, though, Penney said the fund would be transferred from the Citibank scheme to a flexible access drawdown pension plan.

“Under this option, the LTA charge would be reduced to 25 per cent instead of 55 per cent as a lump sum, meaning a tax charge of £588,000 and not £1.3mn,” he said.

“As Mr Chalmers had died below the age of 75 there would be no further tax charges to apply on what was distributed.”

Payment of death benefits as flexible access drawdown was not standard under the Citi UK scheme rules, but Penney said “pension freedom” changes introduced in 2014 gave trustees the power to make payments outside the normal policy.

“It was in the member’s interest for them to do this,” he said. “By not going with this option, Mrs Chalmers is paying an unnecessary additional £700,000 in tax.”

Mrs Chalmers’ advisers at law firm Pinsent Masons also concluded the trustees had discretion to depart from normal scheme policy.

However, the scheme’s trustees did not uphold Mrs Chalmers’ complaint, leaving her and her daughters to settle the full £1.3mn tax bill.

“When a member of the defined contribution fund dies, as was the case following the untimely death of Mr Chalmers, the trustee has a lump sum to pay out in respect of his fund,” the trustees said in a statement.

“The trustee understood and appreciated the widow’s wishes and these were fully considered by the trustee as part of its process. In paying out such benefits under the scheme rules, the trustee must act in accordance with these rules as well as in line with its duties and obligations to the membership as a whole.”

The statement added: “Ultimately in considering the payment of this benefit the trustee took into account all relevant factors but determined that it would not exercise its discretion to convert the defined contribution fund into a defined benefit (spouse’s pension) within the scheme.”

Asked for its reasons for turning down other payment options suggested by Mrs Chalmers, the trustees declined to comment further due to confidentiality and because the case was before the ombudsman.

Mrs Chalmers said she was “extremely disappointed” by the trustees’ position.

“Alan worked hard to build up a pension pot to provide security for us. It is extremely disappointing to see that the very people who are charged with protecting this and acting in the best interests of all beneficiaries have decided to distribute the monies in a way which will see a large part of this eroded by unnecessary tax charges, undermining the whole purpose of the benefit,” she said.

Citigroup declined to comment.

Financial experts noted the government did not require schemes and trustees to use the statutory override to offer more flexible ways for members and beneficiaries to take their pensions, even if they were disadvantaged.

“Ultimately, the trustees should be acting in the best interests of the members,” said Alistair Cunningham, financial planning director at Wingate Financial Planning.

“I cannot see how unnecessarily causing such significant tax charges on the members’ funds could be in anyone’s best interests, other than HMRC’s.”

The case is expected to be heard before the ombudsman in the next 18 months.

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