"Discretionary payment" - is this taxable?

cw18

DH and I used to work for the same company, and both paid into the company pension scheme. As we were both members I had a pretty good idea (or so I thought) of how it worked......

The 'rules' of the pension state that it pays out at 60, and will consist of a lump sum plus monthly payment. I'm totally fine with this.

I was also aware there was a 'death in service' lump sum. But I resigned (and took a job elsewhere) in September 1998, and DH left the company (VST) in March 2000 -- so they both became 'preserved pensions' which is where my knowledge seems to be letting me down.

DH passed away in November of last year (age 52, so pension not yet in payment), so I put in a claim for the Widows pension (and dependant child element as we have a son still in college). I then discovered that the lump sum DH would have received at 60 still gets paid out -- in effect as life insurance, but it's not classed as such.

After various calls between the pension scheme and Inheritance Tax, I have been assured it does NOT need to be declared as part of his estate. The word 'discretionary' is the all important one here, and although DH had completed a nominee form (naming me) that didn't mean they HAD to pay it to me (or in fact to anyone).

So I've been trying to find out whether or not I have to declare it as taxable income against me for this tax year or not

The Occupational Pension office have said I need to check with Inland Revenue. IR say I need to ask the pensions office. (But the woman at IR did say that as the monthly pension is being 'taxed at source' she assumes they would have deducted tax from the lump sum if it were taxable -- however I can't take that as advice, nor quote her if I don't declare it and should have)

When I told IR that I can't get a definitive answer from the pensions office, I was told that all they can suggest is that I send them copies of all the relelvant paperwork -- and they will then assess it and let me know. But the only paperwork I have is the letter than came just before the payment hit my bank account, which merely informs me that they're making the payment and how much it is......


Does anyone have any idea whether I'm likely to have to stump up any tax on this or not as I'm now getting very nervous about it!!!!

I've been using the money to clear debts (as I also lost my job in November), but in theory I could be looking at a tax bill for over £3,600 -- haven't worked out how much above that it will be, as it will actually push me into the 40% bracket :eek:

(I've held back enough for now, but have one more debt that this money would clear -- and really don't want to continue paying interest on the debt for months, only to find out I could have cleared it now!)

Debt_Free_Chick

cw18 wrote: »

I then discovered that the lump sum DH would have received at 60 still gets paid out -- in effect as life insurance, but it's not classed as such.

After various calls between the pension scheme and Inheritance Tax, I have been assured it does NOT need to be declared as part of his estate. The word 'discretionary' is the all important one here, and although DH had completed a nominee form (naming me) that didn't mean they HAD to pay it to me (or in fact to anyone).

On this basis, no you don't need to declare it.

Every lump sum I've come across (working in pensions for 30-odd years) on death, is paid out using the discretionary powers of the trustees. This means that you had no automatic right to receive the lump sum, but the trustees looked at the circumstances including the nomination form and they decided to pay the money to you.

For this reason - payment via discretionary powers - it's tax free.

If you want to put your mind completely at rest, write to the pension scheme adminstrators and ask them to confirm that payment was made using discretionary powers and ask for a copy of the relevant rules covering this payment. There will probably be rule xyz stating that on the death of a deferred pensioner, a lump sum will be paid and that payment will be made in accordance with rule abc and it's the second one that will confirm that the discretionary powers were used.

I've never seen a lump sum on death payable from an approved/registered pension scheme which attracted a tax liability and I'm confident this one doesn't either.