What Happens to My Pension When I Die?

Planning for the future includes understanding what will happen to your pension when you die. Pensions can be a valuable asset, and ensuring that your loved ones benefit from it is an important aspect of financial planning.

Types of Pensions and What Happens to Them

In the UK, there are several types of pensions, and what happens to your pension when you die depends on the type of pension you have.

1. Defined Contribution Pension (Personal or Workplace Pension)

A defined contribution pension is based on how much money has been paid into your pension pot and how your investments have performed over time. When you die, what happens to the money in your pension pot depends on a few factors:

• Before Age 75: If you die before reaching the age of 75, your beneficiaries can inherit your pension pot tax-free, whether they take it as a lump sum, drawdown, or purchase an annuity. The entire value of the pension pot can be passed on, provided you have not yet started drawing on it.

• After Age 75: If you die after reaching the age of 75, your beneficiaries will need to pay income tax on any money they withdraw from your pension at their marginal rate. They can still take the pension as a lump sum, drawdown, or annuity, but the tax treatment is different.

2. Defined Benefit Pension (Final Salary Pension)

A defined benefit pension, also known as a final salary pension, provides a guaranteed income based on your salary and years of service with your employer. When you die, the benefits available to your dependents vary depending on the scheme’s rules:

• Spouse or Civil Partner: Typically, your spouse or civil partner will receive a percentage of your pension, often 50% to 66%, depending on the scheme rules. Some schemes may offer a higher percentage.

• Children: Some schemes also provide for dependent children, who may receive a portion of your pension until they reach a certain age, typically 18 or 23 if they are in full-time education.

• Lump Sum: Some defined benefit schemes also offer a lump-sum death benefit, especially if you die before retirement. This lump sum might be a multiple of your salary or based on your accrued pension benefits.

3. State Pension

The UK State Pension is not inheritable in the same way as private pensions. However, your spouse or civil partner may be able to inherit some of your State Pension benefits:

• Additional State Pension: If you reached State Pension age before April 6, 2016, your spouse or civil partner may inherit part of your Additional State Pension or inherit some of your State Pension based on your National Insurance contributions.

• Protected Payments: If you reached State Pension age after April 6, 2016, your spouse or civil partner might inherit a protected payment if you were entitled to one.

Tax Implications

The tax treatment of inherited pensions depends largely on whether the pension holder dies before or after reaching the age of 75:

• Before Age 75: If you die before 75, your beneficiaries can inherit your pension tax-free, whether they take it as a lump sum, drawdown, or annuity. This applies to defined contribution pensions and any lump-sum death benefits from defined benefit pensions.

• After Age 75: If you die after 75, any income or lump sum taken by your beneficiaries will be taxed as their income at their marginal rate.

How to Ensure Your Pension Goes to the Right People

To ensure your pension benefits go to the right people when you die, it’s essential to:

1. Nominate Beneficiaries: Most pension providers allow you to nominate one or more beneficiaries who will receive your pension benefits when you die. Make sure you keep this information up to date, especially after major life events such as marriage, divorce, or the birth of children.

2. Write Your Pension in Trust: For defined contribution pensions, you may be able to write your pension benefits in trust. This can help ensure your beneficiaries receive the benefits more quickly and may also help mitigate inheritance tax.

3. Review Your Will: While pensions are typically not part of your estate and are not covered by your will, it’s still important to review your will regularly to ensure it reflects your overall wishes.

What Happens If You Haven’t Named a Beneficiary?

If you haven’t nominated a beneficiary for your pension, the pension provider or trustees of your pension scheme will decide who should receive your benefits. They may choose your spouse, civil partner, children, or other dependents. If there are no obvious dependents, the benefits may be paid to your estate, which could have different tax implications.

Conclusion

Understanding what happens to your pension when you die is crucial for effective estate planning. By nominating beneficiaries and keeping your pension arrangements up to date, you can ensure your loved ones are taken care of and that they benefit from your pension in the most tax-efficient way possible. Always review your pension arrangements regularly, especially after significant life events, to ensure your wishes are accurately reflected.

If you’re unsure about the best course of action or have complex financial circumstances, it’s advisable to seek guidance from a financial advisor who can provide tailored advice based on your situation.

This comprehensive guide should provide clarity on what happens to different types of pensions in the UK when someone dies, ensuring that your loved ones are well-prepared and informed.

Other Articles

What is State Pension?

What is UK Pension Age?

What is Workplace Pension?

Can I Cash in my Workplace Pension at 55?

Can I Change my Workplace Pension Provider?

Can I Have a SIPP and a Workplace Pension?

Can you Inherit a Pension?

How Do I Claim My Workplace Pension?

How Much is State Pension?

How to Claim Higher Rate Relief on Pension Contributions

Is State Pension Taxable?

What Happens to My Pension When I Die?

When Did Workplace Pensions Start?

When Will I Get My State Pension?