Overdue children’s pension payments - tax implications

[ataxingtime]

My dad died many years ago when I was a child.
A pension scheme administrator has recently contacted my brother and advised that we are both possibly due a death in service payment and children’s pension payments.
We’ve sent over the requested documentation and had confirmation that we are due these payments, with amounts to be confirmed next week.
However, my brother has warned me to be prepared to be taxed on the child pension sum, and i am at the very threshold of my current tax bracket, so it will knock me into the next rate and that I may get a bill next tax year. My brother will also be heavily taxed (granted we don’t know what the overall sum will be be).

Is there any way to challenge this, considering these pension payments should have been paid 25-30 years ago?

Any advice appreciated as anything tax and pension related always baffles me.

Apologies for weird formatting in first half my post. I can’t edit that.

Thanks.

Nothing to stop you refusing the payments, so that there would be no tax due.

tax is marginal, you only pay the higher rate on the amount over the threshold

You will likely have the payment taxed at source, ie before you receive it. Then you will have to deal with HMRC to challenge any rebate due.

My father worked a hard, physically demanding job only to then die in a workplace accident as a young man, which left us as orphans. Refusing it would feel somewhat ungrateful for his efforts.

Thank you. This is what we thought, but weren’t sure if there would be any basis for challenging.

If you provide HMRC all the details once you have had the payment, they should be able to adjust the tax so that it reflects the tax you would have paid if the money had been paid in the correct tax years (iyswim).

you need to get some advice, payments from pension schemes if the person died before 75 are usually tax free. If the tax is going to be substantial it is best for you and your brother to do this but the pension scheme may be able to advise.

This part I understand, but I am literally pounds below the 42% tax band, so anything I would receive would then be taxed at that amount. Is that correct?

@UnPetitDunPetit and @Toddlergrumpsthank you both. We’ll do this then, if the figures are significant. We didn’t know if anything like that was possible.

So you’ll get 58% of something you didn’t even know you were going to get.

I'd suggest speaking to the scheme administrators in the first instance if you haven't already done so. They will have dealt with this scenario before and may be able to signpost you to who to contact within HMRC and what information to provide.

Well she will hopefully get more than 58% of something that she should have had when her father died.

You can always redirect it into your own pension. I am the same, so anything I earn over my basic rate goes into my workplace AVC scheme.

when I was on mat leave I got a lump sum of about 3 years back pay- that’s the nhs for you. Was enough to take me over the next tax bracket. I did phone hmrc try to argue at the time that it should have been earned by n previous tax years, but got told it gets taxed when you get paid it.

would be interested to know if pp is correct in that you can ask them to apply it differently.

anyway i just shoved it in my pension and avoided the higher tax rate that way.

PP is correct. Pensions are taxable on an accruals basis ie when they were “ earned” rather than when they are paid. But it’s likely tax will be deducted under PAYE. So with information and help from the insurer you should be able to claim this back. I assume that you had no/low taxable income as children.

Is the money definitely out of the pension product? If it is still in a tax wrapper, you may ne able to leave it there for now, instead of drawing down. Death in service payments are usually tax free too. You probably need more information first before you can work out the most tax efficient way to do things.

From the description in the OP this may not be an option - sounds like this is a death benefit from a defined benefit scheme.

Worth contacting HMRC for advice, as it does feel unfair that you wouldn’t have been taxed at all if you’d have received this when you were due it. Do HMRC have a helpline?

If the delay is due to an administrative error by the pension scheme, the scheme or trustees may agree to compensate you for the additional tax by making a distress & inconvenience payment. I suggest you ask them why the payment was not made previously & request this.

This! Where have they been all these years?!

I really don’t know. I can’t remember what my brother said when they initially got in touch.

I will ask the question by email tomorrow, but I’m reluctant to rock the boat as the words ‘trustee’s discretion’ have been used a few times, plus my dad was actually my stepdad (from when I was aged 3), so although they have accepted my brothers explanation of that, I still feel they could change their mind on me being due anything. Although it would presumably go to my brother who would give me it anyway.

I receive a death in service payment for myself and a separate one for my 10 yo son. I don't have to pay any tax on my son's payment, even though I'm a higher rate tax payer. Not sure if that's helpful but if you had received the payments in childhood they wouldn't have been taxed.

This is HMRCs manual detailing the taxation of pension arrears which may be helpful OP

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim75020

This is interesting as my dad died when I was in primary school.

my mum got/gets a fairly large pension- her income is more than mine and she’s never worked.

we didn’t get anything. Never received a penny in our own names. I never thought much of it but occasionally have wondered why children aren’t supported in their own right.

I’m sorry to hear about your dad.

My mum had already died before my dad, so I’m not sure we would be receiving anything if she had survived him.

But @NoArmaniNoPunanimentions her son receiving payments, so perhaps it depends how things are set up initially.

My mum dying before my dad may be part of why it’s never been paid out until now.

Would you have had to pay tax on it if the money had been paid to you at the time it was originally supposed to have been paid?

If not, then it is entirely reasonable that you should not have to pay tax on it now.