A failure to pay a lump sum death benefit within two years of notification of the member’s death has resulted in a trustee being ordered to pay over £50,000 to the nominated beneficiary who lost out as a result (Mrs L CAS-66581-S4T8).
At the date of her death, the member, Mrs T, was receiving a pension from the scheme. She had not yet reached state pension age. In these circumstances, the scheme rules provided that a lump sum death benefit was payable in addition to a survivor’s pension. However, the trustee overlooked that a lump sum was payable until this was flagged in an audit almost three years later. Had the trustee paid the lump sum within two years of being notified of the death, it would have had a discretion over who to pay the lump sum to, with potential beneficiaries including the member’s estate and various relatives of the member. However, once the two year period had elapsed, the scheme rules obliged the trustee to pay the lump sum to the member’s estate.
Mrs T had consistently nominated Mrs L, her daughter from her first marriage, to receive any lump sum death benefit. The two beneficiaries under her will were Mrs L and Mrs T’s husband, Mr T. However, Mr T was the only residual beneficiary of the estate meaning that the whole of the lump sum of almost £135,000 went to Mr T. Mrs L negotiated with Mr T and they came to an agreement under which the will was varied so that Mr T received £50,000 from the death benefit and Mrs L received the remainder.
The Deputy Pensions Ombudsman (DPO) upheld a complaint from Mrs L and ordered the trustee to pay Mrs L £50,000 in respect of the portion of the lump sum retained by Mr T, as well as paying her £1000 for distress and inconvenience and reimbursing the legal costs she incurred in respect of the will variation. The DPO found on the balance of probabilities that, had the lump sum been paid on time, the trustee would have paid the full lump sum to Mrs L in accordance with the nomination form. The DPO noted that Mrs T had been consistent in nominating Mrs L as the recipient of the lump sum. In 2003 Mrs T had updated her nomination form to reflect that Mrs L had changed her name on marriage. At that point, Mrs T had already been married to Mr T for approximately 10 years. In 2005 when she completed her retirement option form, Mrs T had restated her nomination of Mrs L. The DPO rejected the trustee’s argument that, because the trustee would have had discretion who to pay the lump sum to had it paid on time, there was no guarantee that it would have paid the lump sum to Mrs L.
Our thoughts
In many cases where a lump sum is inadvertently paid more than two years after the trustees become aware of the member’s death, the key issue is that a tax charge is incurred which could have been avoided. However, this case is a reminder that, depending on what the scheme rules say, late payment may mean that the trustees lose their discretion and must pay to the estate. This may affect who ultimately benefits from the lump sum. The argument that the trustees would have had a discretion to pay to the estate will not necessarily be a defence to any claim.
