What will happen to your pension when you die?

The way that you decide to take your pension will affect what you can do with it when you pass away. While it’s not always easy to talk about, the way you eventually pass on your pension has the biggest impact on other people, so it will help talking to your spouse, children or other people close to you when you’re deciding how you take your pension savings.

The type of benefits that can be paid (lump sum and/or income options) will depend on the scheme rules and the type of arrangement the benefits are being paid from. If you have the option to nominate whom you want to benefit, this may have an impact on the type of death benefits that can be paid.

You can let your pension provider know whom you would want to leave your pension to in the event of your death (the nominee) by completing a nomination or expression of wish form. While this is not binding, it will be taken into account when paying death benefits.

It’s therefore really important to keep this information up to date as your wishes and circumstances change. Contact your provider and ask for a nomination or expression of wish form to nominate who should inherit your pension.

Rather than have your money die with you, you may have selected a guarantee period or a joint life option, or both, when you set up your annuity. This means an ongoing income will be paid to your loved ones for either a set period of time – or for the rest of their lives.

If you die before age 75 with your money in flexi-access drawdown, your spouse, partner, dependant or nominated beneficiary can stay in the flexi-access drawdown plan and take income tax-free or take the remaining value as a lump sum tax-free. They could also buy an annuity, where income would be paid tax-free.

If you die after age 75 with your money in flexi-access drawdown, your beneficiary can stay in the flexi-access drawdown plan and take income subject to tax at their marginal rate. They could also take the pension as a lump sum, which will be subject to income tax at their marginal rate, or buy an annuity where income is subject to tax at their marginal rate.

If you’re under the age of 75 and become seriously ill (you’re expected to have less than 12 months to live) you may be able to take your whole pension fund as a tax-free lump sum. If you’re over the age of 75 in this circumstance you may take any remaining pension as a cash lump sum, which will be added to your income and taxed accordingly.

When you die, your husband, wife or registered civil partner may be entitled to receive some of your State Pension entitlements depending on individual circumstances. They need to be over State Pension age to claim extra payments.

What they receive and how they claim will depend on whether they reached State Pension age before or after 6 April 2016. They will not get it if they remarry or form a new registered civil partnership before they reach State Pension age.

If they reached State Pension age on or after 6 April 2016 they’ll receive the ‘new State Pension’ and they may be able to inherit an extra payment on top of their pension if the deceased’s state pension included a ‘protected payment’.

Professional financial advice can help you manage your money before and during retirement. To find out more and discuss your options – please contact us.