Pension firm failed to pay my mum £52k – then taxman took £17k

My late father had a company pension and when he passed away the pension went to his widow, my mother.

Due to my mother’s dementia (I have Power of Attorney) I found the pension has not been paid since April 2019.

The administrators have offered me an apology and the back pay on the pension from the above date to now was £52,432.05.

When I checked with my mum’s bank they said they had received a payment of £35,321.24 and I queried where the other £17,110.81 was and they said it been taken out as income tax.

Double blow: Pension firm failed to pay my mum with dementia £52k over four years – now HMRC has taken £17k in higher rate tax on her belated lump sum

The administrators have forced my mother into a higher rate income tax level due to her not receiving the pension and obviously I am far from happy about this.

All this time there has been no interest from the pension as my father had this paid into a savings account rather than a current account, we have inflation to take into account and the better standard of living my mother could have had.

Obviously, this has caused a lot of upset and my mother has received a letter from the Inland Revenue and she has been charged 40 per cent income tax.

This is totally the error of the administrators and I would value your comments on this matter.

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Steve Webb replies: I was sorry to hear about the problems that you and your mother have faced regarding her widow’s pension.

I contacted the administrators on your behalf and they wrote to you explaining what had happened.

Apparently, there was a problem with your mother’s bank details which led them to suspend payments in March 2019.

New bank details were supplied in June 2019, but they failed to put the pension back into payment and it only restarted in late 2022.

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In their letter they admitted that because the pension had been paid in one big lump rather than month-by-month since 2019, ‘your mother has paid more tax than she would have done’.

However, they said that they had no choice but to deduct the tax and you would have to deal with HMRC about this.

The administrators also said in their letter that they had noticed a further error and that your mother was owed a further payment for the missing pensions due in April and May 2019 which had never been paid, so an additional payment would now be made.

They also offered you £1,000 in compensation for the distress caused to you and your family.

You wrote to HMRC regarding the tax treatment of the lump sum and pointed out that because it related to previous years it should not all be taxed this year (taking your mother into the higher rate tax band).

Unfortunately, HMRC simply said that this would all be dealt with at the end of the tax year and it couldn’t help at this stage.

This left you in a difficult position to decide whether to press the administrators for proper compensation or whether to hope HMRC would ultimately sort things out.

I contacted HMRC and they gave me the following comment regarding your mother’s tax position: ‘We wrote …explaining that her tax affairs will be reviewed at the end of this tax year, and shared what information she will need to send so we can complete a full review of her finances.

‘This is a standard process in such cases so we can ensure customers don’t ultimately end up paying more tax than they should.’

Whilst this comment did not really clarify matters, HMRC have also informed me that if a pension provider has paid a lump sum to a customer which includes pensions arrears that were due for previous tax years, the customer can ask HMRC to reallocate these for each individual year, which they will do at the end of the tax year.

In other words, all being well, you should be able to contact HMRC after 5th April and ask them to spread the lump sum across 2019/20, 2020/21 and 2021/22, as the lump sum relates to pensions due to be paid in each of these years.

If this is done then it should mean that your mother no longer has to pay higher rate tax on any of these payments.