What happens to your pension when you die?
There are a range of factors that can influence whether your pension gets handed off to your dependants. One is what kind of pension you have.
After you have spent 40 years or more paying into a pension, chances are it’s going to be one of your biggest assets, and so it is only natural that you want to know what happens to it when you die.
Where your retirement savings will go when you die depends on a number of factors: your age; the type of pension you have; and whether you have started taking money from your pension. We’ll look at all the different scenarios below.
What happens to my defined benefit pension when I die?
If you have a defined benefit, or final salary, pension and you haven’t started taking an income from it when you die, your scheme may pay a ‘dependant’s pension’ to a spouse or civil partner and sometimes children that are financially dependent on you. Scheme rules vary, so it is important to check what you are entitled to.
Recipients of dependant’s pension may have to pay tax on this money, depending on their circumstances.
It is likely you will have life insurance linked to your pension, too, which will be paid to your beneficiaries as a tax-free lump sum. How much you get is normally linked to your earnings (for example, a multiple of your salary).
Defined benefit pensions will often still pay a pension to your dependants if you die after you retire, but it is likely to be a reduced amount. Again this money will be taxable.
What happens to my defined contribution pension when I die?
This will depend on whether you have accessed your pension. If you haven’t yet taken any money from your defined contribution pension and you are under 75, your pension can be passed to your beneficiaries tax-free.
If you have started drawing on your pension when you die but are under 75, your beneficiaries can inherit whatever is left in your pension pot tax-free.
If you are 75 or older when you die, your beneficiaries will have to pay income tax on any pension you have left.
What happens to my annuity when I die?
In most cases, if you have bought an annuity with your pension savings, when you die your annuity cannot be passed on to your beneficiaries and payments stop. However, when you buy an annuity you can set up some protection for a spouse or other financial dependant.
If you purchased a joint annuity, the other person named on the annuity will continue to receive an income, although it is likely to be a reduced amount. Value-protected annuities allow you to safeguard a certain amount of your money, so they will pay a lump sum back to your beneficiaries on death unless you have received more than this in annuity payments.
Annuities with a guaranteed period, meanwhile, will pay your income for a set number of years, even if you die. So if you had a 10-year guarantee and you died after five years, payments would be made to your beneficiary for another five years.
» MORE: All about pension annuities
Will my pension be taxed when I die?
Pensions sit outside of your estate for inheritance tax purposes. This means your pension’s value won’t be included when working out if your estate is large enough to be eligible for inheritance tax. Plus, if you do have to pay inheritance tax it won’t be payable on your pension.
However, pensions can’t necessarily be passed on completely tax-free. The table below shows what tax might be due.
|What is being inherited||Your age when you died||What tax is due|
|Unspent cash you took out of your pension ||Any age||Inheritance tax may be payable but only if your total estate is worth more than the threshold for the tax.|
|A pension you haven’t accessed||Under 75||Tax-free (if claimed within two years of your death)|
|A pension you haven’t accessed||75 or older||Income tax (paid by the recipient at their own rate)|
|The remainder of a pension you have accessed||Under 75||Tax-free|
|The remainder of a pension you have accessed||75 or over||Income tax (paid by the recipient at their own rate)|
|An annuity that is set up to pay benefits after you have died (ie joint annuity or one with value protection or guaranteed periods)||Under 75||Tax-free|
|An annuity that is set up to pay benefits after you have died (ie joint annuity or one with value protection or guaranteed periods||75 or over||Income tax (paid by the recipient at their own rate)|
It might make sense to do some tax and estate planning before you take an income from your pension. For example, if you have other savings or investment accounts, you may want to consider using that to provide an income before you dip into your pension. Working with an Independent Financial Adviser (IFA) might help you to sort it all out.
How do I ensure the right person inherits my pension?
When you join a workplace pension you will usually be asked to name someone as your pension beneficiary. That means the pension company will pay them anything left in your pension when you die. It is important your pension provider gets this information and that you keep it up to date. Research by Royal London found that almost 750,000 people approaching retirement hadn’t updated their pension beneficiary after a divorce. This means their ex-spouse could be in line for a big inheritance when they die.
You should also include your pension – and who you want to inherit it – in your will. Details of your pensions can be held with your will so that your executors know where to find them.
If no beneficiaries are named for a pension it is up to the pension provider to decide who inherits. This is usually the next of kin and any dependents.
» COMPARE: Personal pension providers
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Ruth is a freelance journalist with 15 years of experience writing for national newspapers, magazines and websites. Specialising in savings, investments, pensions and property. Read more