How your pension is managed on death.
What happens to your pension when you die depends on a number of factors such as the type of pension you have and how old you are.
While most of us don’t like to think about dying, if you want some control over who will get your pension when you die, it’s important to understand the rules and make sure you have completed the right paperwork with your pension provider. Here we explain the main rules around pensions on death.
Private pensions are either workplace pensions that you get through your employer or a pension that you set up yourself, for example a stakeholder pension or a Self-invested Personal Pension (SIPP). Most private pensions are what are known as defined contribution pensions, but some people do still have defined benefit pensions. These are treated differently when you die so check which one you have.
It depends on your age.
When you die, your pension can be passed on to the person or people you have chosen (your beneficiaries) tax-free as long as you have enough lifetime allowance available. The payment of the death benefit to your nominated beneficiaries is at the discretion of your scheme administrators, although they will normally follow your wishes. This needs to happen within two years of you dying if you hadn’t yet started to draw your pension benefits.
There are usually three ways your beneficiaries can access the money in your pension:
There’s no need for you to decide anything in advance. Your beneficiaries choose the option that suits them best and your pension scheme administrators make it happen.
If you had already purchased an annuity before your death, your pension administrators review your annuity provider’s terms to decide what happens to your pension when you die. Generally, annuities payable under a lifetime annuity contract are tax-free if you die aged under 75 – it depends on whether a death benefit annuity has been built-in to the terms of the contract.
The person inheriting your pension will pay their usual rate of income tax on the death benefit.
You can nominate a beneficiary, but your scheme administrators make the decision. They are likely to follow your wishes though.
Thanks to the Freedom and Choice in Pensions measures introduced in 2015 you can nominate anyone you like to inherit your pension: your husband, wife or partner, children, close friends or a charity - it’s up to you.
Nominating people to inherit your pension is a straightforward bit of paperwork. The document is usually called an Expression of Wish and you should be able to complete it online.
Remember to keep this up to date if you want to retain some control over what happens to your pension when you die. Life events such as a baby, divorce and new job can change your circumstances. It’s a good idea to review your nominees once a year to catch such changes.
If you die without choosing who you want your pension to go to, your pension is still passed on, but it takes longer, and it may not necessarily go to the person you would have chosen. Your provider gathers information from different sources including your Will to determine who inherits your pension.
People are often surprised to learn that their Will doesn’t actually cover their pension.
Instead of taking instructions from your Will, your pension provider refers to your Expression of Wish to decide what happens to your pension when you die. Providers usually refer to your Will, but only to check details such as who your dependants are and how you’ve divided up your estate.
It’s useful to remember you can update your nominated beneficiaries with your pension provider at any time and it doesn’t cost you a penny - there are usually charges involved when you update your Will.
Because final salary pension schemes (also known as defined benefit pensions) are set up by employers and tailored for their employees, they don’t all have the same rules so you should check carefully with your pension administrator.
Usually, you can leave your final salary pension to your:
The amount they receive usually depends on whether you have retired or not and the scheme rules.
Your scheme’s administrators usually offer a lump sum death in service benefit if you are still working which is worth up to two to four times your salary. This can be inherited tax-free on death before age 75.
Providers also pay a reduced pension which is often worked out as a percentage of your pension entitlement and is taxed at your beneficiary’s rate of income tax, even if you die before age 75.
Approved beneficiaries are usually paid a reduced version of the pension you received on retirement.
Your final salary scheme’s administrators will explain to your beneficiaries what happens to your pension when you die.
The Department for Work and Pensions decides what happens to your State pension when you die, and the rules are complex.
State pensions are split into three categories:
It’s only your husband, wife or civil partner that are entitled to get anything and how much they get is governed by several factors. This includes:
After the Department for Work and Pensions has reviewed your circumstances, they will notify your beneficiary if they are eligible to inherit your State pension as extra pension payments.
Because your pension is not included in your estate there is normally no Inheritance Tax to pay when you die but there might be other tax owing.
It will depend on the pension type you have and how old you are when you die.
There is usually no tax to pay if you die before your 75th birthday. If you die after you turned 75, your beneficiaries are usually charged at their usual rate of income tax.
Advice in relation to inheritance tax planning is not regulated by the Financial Conduct Authority, however, the products used to mitigate tax may be regulated.
Speak to our experts for more information on pensions or to find out about our SIPPs.Call us on 020 7189 9999
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