Cash Clinic: Unravelling the tax obligations of an occupational pension scheme

Published on Friday 17 October 2008 22:41

Q WHEN my bachelor brother died in 2005, his estate was under the then nil rate band inheritance tax limit. Part of his estate consisted of a death benefit from an occupational pension scheme with his former employer, which was also advised of his death so as to stop it paying his monthly pension. It, in turn, advised that a death payment amounting to about £35,000 was due from the scheme.

There were considerable legal difficulties in obtaining confirmation, so my siblings and I were unable to administer his estate. These difficulties were ironed out this year, but on applying to the pension scheme for payment of the sum we were advised that, due to the delay in making the claim, the scheme was obliged to make tax payments to HMRC of between 40 and 70 per cent.

It is claimed that “defined benefit” must be paid within two years or it becomes an “unauthorised payment” that is subject to charge and possibly an “unauthorised payment surcharge”. This seems unusual as no-one was legally able to make the claim within the indicated two-year time limit due to difficulty in obtaining information.

If this is HMRC regulations, would the pension administrators not have an obligation to protect the payment or at least advise the probable executors and beneficiaries of this potential tax liability? CM Fife

A: Glen Gilson and Gregor Munro. The Taxation of Pension Schemes (Transitional Provisions) (Amendment) Order 2006 (SI 2006/1962) states that certain lump-sum death benefits must be settled within two years from the date of death or they will be deemed to be an unauthorised payment.

The period is extended to two years from the date on which the pension scheme administrator could reasonably (or ought to) have known of the death of the member, rather than from the date of death as administrators do not always learn of the death immediately.

If a scheme makes an unauthorised payment, large scheme charges can accrue. First, there will be an unauthorised payments charge of 40 per cent of the unauthorised payment. In addition, an unauthorised payments surcharge of 15 per cent will be levied where the payment is more than 25 per cent of the member’s fund value and finally, a scheme sanction charge of 40 per cent will be levied, although this is reduced by the lesser of 25 per cent of the payment received by the member and the unauthorised payment charge. The maximum a total charge can be is 70 per cent.

Without reviewing in detail the correspondence between the executors and the pension administrators plus the scheme rules and policy documentation, it is difficult to give a definitive response.

Whether any parties involved with your brother’s affairs should have acted differently will be dependant upon the facts of the case and it is difficult to comment on whether or not this matter could or should have been dealt with more efficiently.

It would be fair to expect the scheme administrators to make the executors aware of the rules and the two-year deadline. If this has not been the case, you could certainly raise this with them.

If you do not get anywhere going down that route, then you could try The Pensions Advisory Service ( www.pensions advisoryservice.org.uk or 0845 601 2923) and seek its views, but there may be little that it can practically do. As with most changes in legislation, new provisions can take time to bed in.

Estates can take time to finalise and two years must be the limit that the regulators feel is practical, but this is not likely to be the first query and will not be the last of this type that pension trustees, regulators and advisers will face.

The administration of estates is a complex activity that frequently requires specialist legal and financial input to maximise the estate and fulfil all the administrative requirements in terms of tax returns and accounts

• Glen Gilson is partner and head of private client & financial services and Gregor Munro is a financial adviser at HBJ Gateley Wareing

• If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [e-mail]. No responsibility for loss occasioned by any person acting, or refraining from acting, as a result of these answers can be accepted by HBJ Gately Wareing or The Scotsman Publications Ltd