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. Pension inheritance is an important consideration and so this article explains what happens to your state, personal and workplace pensions when you die.

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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 state pension benefits available for your dependents. However, your spouse or civil partner may be eligible for Bereavement Support Payment, and they might also be able to inherit part of your Additional State Pension or a protected payment, depending on when you reached State Pension age. 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 - Moneyhelper (Formerly The Pensions Advisory Service).

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. It is worth noting that new rules from 6th April 2027 mean that most unused pension funds will also form part of your estate for inheritance tax purposes.

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 subject to income tax at the recipient's marginal rate of tax. Additionally, from 6th April 2027, the remaining pension pot will be subject to inheritance tax, though death-in-service benefits will remain exempt.

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, again, 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 things you will need to understand:

• Death in service is a separate benefit to your pension scheme, however, it typically sits alongside it
• Death in service offers life cover, typically 2, 3 or 4 times your salary
• It is important to understand what constitutes as salary for this benefit. Is it just 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 your death-in-service benefit
• If you leave your employment you will lose your death-in-service 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 income from your pension.

What if I die whilst I am 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. If the deceased was over the age of 75, the lump sum will be subject to income tax at the beneficiary's marginal rate. Furthermore, from 6th April 2027, these unused funds will be included in the estate for inheritance tax purposes.

What if I die whilst I am retired but not receiving an income from my defined benefit pension

If you have deferred taking your defined benefit pension and die during retirement before claiming it, a reduced pension or lump sum may be payable to your spouse, civil partner, or dependents. The exact benefits will depend on your specific scheme's rules.

What if I die whilst I am retired and receiving an income from an annuity

An annuity is a financial product that provides 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 (often known as a joint life annuity), or if you included a guarantee period when you purchased it, then these payments will continue upon your death.

What if I die whilst I am 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 recipient's marginal rate of tax. As with other unused pension funds, from 6th April 2027, any remaining drawdown funds will also be counted as part of your estate for inheritance tax.

Pension inheritance tax rules

Currently, pension benefits do not form part of your estate on death, so they will pass to your beneficiaries free of inheritance tax. However, this rule is changing. The government has announced that from 6th April 2027, most unused pension funds and death benefits will be included in the value of a person’s estate for inheritance tax purposes. This means they could be subject to an inheritance tax charge if your total estate exceeds the available allowances. Funds passed to a surviving spouse or civil partner will remain exempt.

Despite these upcoming changes, it should be noted that your pension is not normally 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 (often called an expression of wish) 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 12 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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