What happens to my pension when I die?

8 min Read Published: 06 Jan 2020

What happens to my pension when I die?When thinking about pensions it is normal to focus on the income you can build up for a comfortable retirement. However, with around 19% of men and 12% of women not reaching the age of 65, it is just as important to understand what will happen to your pension when you die. This article will explain what happens to your pension on death across a variety of scenarios.

What happens to my state pension if I die before retirement?

If you die before you have reached your State Pension age there will be no pension benefits available for your dependents. If you have reached your State Pension age then there may be an option to transfer some of your pension benefit to a partner depending on certain criteria. To understand more visit - The Pension Advisory Service - Death Benefits.

What happens to my personal pension if I die before retirement?

If you have a personal pension and die before retirement then the value of your pension pot will be passed to your beneficiaries. If you die before the age of 75 then all benefits passed to your beneficiaries will be tax-free. If you die after the age of 75 then pension benefits will be taxed at the recipient's marginal rate of tax.

What happens to my workplace pension if I die before I retire?

What happens to your workplace pension if you die before you retire will depend on what type of pension you have.

There are two types of workplace pension:

Defined contribution pension

A defined contribution pension is one where the pension benefits you receive will depend on the value of your pension pot at the time you take your pension income. If you die before you start drawing your pension then the value of your pension pot will be passed to your nominated beneficiaries. There may also be a death in service benefit available of up to four times your annual salary which will be tax-free if you die before the age of 75, for more information you will need to speak to the pension provider or scheme administrator. If you die after the age of 75 then pension benefits will be taxed at the recipient's marginal rate of tax

Defined benefit pension

A defined benefit pension will typically be a pension provided by an employer where the pension received in retirement will depend on your salary and length of service. If you die before you start drawing your pension a reduced pension will be payable to your spouse, partner or children. There may also be a death in service benefit available of up to four times your annual salary which will be tax-free if the deceased is under the age of 75, for more information you will need to speak to the pension provider or scheme administrator. If you are still in the pension scheme and die after the age of 75 then pension benefits will be taxed at the recipient's marginal rate of tax

Death in service benefit explained

It may be worth explaining a bit more about death in service benefits as there are some issues you will need to understand.

  • it is a separate benefit to your pension scheme but typically sits alongside it
  • offers life cover usually 2 or 4 times salary
  • it is important to understand what constitutes your salary for this benefit, is it basic salary or your total income (including bonuses & overtime). It is worth contacting your pension scheme administrator to clarify this point
  • if you opt-out of your company scheme to arrange your own pension then you may lose this benefit
  • obviously, if you leave your employment you will lose this benefit so this needs to be considered when pursuing other employment opportunities

What happens to my pension if I die during retirement?

If you die during retirement it will depend on if and how you are receiving any income from your pension.

Retired but not receiving an income from my defined contribution pension

If you are not taking any income from your pension then the value of your pension pot will be paid as a lump sum to your beneficiaries. This will be tax-free if the deceased was under the age of 75.

Retired but not receiving an income from my defined benefit pension

If you are part of a defined benefit scheme then your pension benefits will automatically start when you retire from your employer.

Retired and receiving an income from an annuity

An annuity is a financial product that will provide an income for life from your pension fund. Generally, if you die whilst receiving an income from an annuity, then income will cease on death. If you have arranged your annuity to provide an income to a spouse or children then these payments will commence on your death.

Retired and receiving drawdown income from my pension

If you are under the age of 75, your pension drawdown income or pension pot will be passed on tax-free to your beneficiaries. If you are over the age of 75 then your pension drawdown income or pension pot will still be passed on to your beneficiaries but will be liable to income tax at the recipients' marginal rate of tax.

Pension inheritance tax rules

Pension benefits do not form part of your estate on death so will pass on to your beneficiaries free on inheritance tax. It should be noted that as your pension does not form part of your estate it will not be covered under the terms of any will you have. You can, therefore, nominate someone who is not a beneficiary under the terms of your will to receive your pension benefits.

You can make a nomination with your pension provider regarding who should receive your pension benefits on death and this nomination should be reviewed regularly as circumstances may change.

To find out more about inheritance tax then read our article - The 10 best ways to avoid inheritance tax  

Making a will

It is important when discussing what will happen to your assets on death to make sure you have a will in place. This will ensure that your wishes are complied with upon your death. To find out more It is worth reading our article - What happens if I die without a will?

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