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What happens to your pension when you die?

Financial PlanningWhat happens to your pension when you die?

At Hoxton Wealth, we deal with hundreds of clients who ask the question, “What happens to my pension when I die?”. Thinking about death may be challenging, yet it is crucial to grasp the implications for your pension and the associated tax consequences upon your demise.

Upon your death, your pension may be accessible to your spouse, civil partner, or beneficiaries. The regulations governing pension death benefits are contingent on the specific type of pension you possess and your age at the time of your passing. It is also important to plan for your death and finances by making sure you have a Will & Lasting power of attorney (LPA) in place.

  • Pension rules after death

    After 2015, new pension regulations were introduced, including various aspects such as pension access and the treatment of pension funds after death. Pensions are typically considered separate from your estate, enabling beneficiaries to access your retirement savings without incurring inheritance tax obligations.

    Both workplace and private pension schemes usually offer death benefits. In the event of your death, it is advisable for your beneficiaries to get in touch with us below to obtain more information. If you were already receiving your State Pension before your passing, your pension beneficiary should contact the Pension Service for necessary guidance and assistance.

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What happens to your private pension when you die?

If you are a workplace pension scheme member or have transferred your pension into a SIPP, you possess what is commonly referred to as a private pension. Private pensions are typically categorised into two main types:

The specific type you hold will dictate the extent to which your beneficiaries can make claims on your pension and the timing of such claims in the unfortunate event of your death.

Defined contribution pensions

Your age determines the primary rule governing defined contribution pensions in the event of death at the time of demise and whether you have initiated pension withdrawals.

If you pass away before reaching your 75th birthday and have not yet commenced pension withdrawals, your pension can be transferred to your beneficiaries free of tax. In such cases, your beneficiaries can receive the pension as a lump sum, invest it in a drawdown, or use it to purchase an annuity. They must claim the death pension within a two-year period, after which tax implications may arise.

If you die before your 75th birthday but have already started drawing your pension, the actions your beneficiaries can take depend on the method you have chosen to access your savings. If you have taken a lump sum and still have remaining funds outside your pension, those funds will be considered part of your estate. However, if you have opted for a drawdown, your beneficiaries can access the remaining pension funds tax-free. They can receive it through drawdown payments, a lump sum, or by purchasing an annuity.

Regarding annuities, the situation is more complex. Generally, if you have already commenced receiving income from an annuity before your death, it cannot be passed on to a beneficiary. However, certain annuities, such as joint life, value-protected, and guaranteed term annuities, may be eligible for pension transfer after death. If you have any of these annuities, your beneficiaries may receive future payments tax-free, but specific conditions may apply. It is recommended that your beneficiaries contact your annuity provider for further information.

If you pass away after your 75th birthday, your beneficiaries will be liable to pay income tax on any pensions you leave behind. Their marginal income tax rate will determine the tax rate, and it’s important to note that a significant lump sum death benefit could potentially push them into a higher tax bracket.

To ensure the smooth transfer of your pension to your beneficiaries after your death, it is crucial to contact us and inform us of the contact details of your nominated beneficiaries.

Defined benefit pensions

Defined benefit pensions operate under a slightly different framework, as their value is tied to your salary and the duration of your employment with the employer. The primary rule governing defined benefit pensions in the event of death centres around whether you were retired before your demise.

If you pass away before retiring, your pension typically provides a lump sum payment ranging from two to four times your salary. If you are below 75 at the time of death, this payment will be tax-free for your beneficiaries. Additionally, defined benefit pensions commonly include a “survivor’s pension,” typically disbursed to a spouse, civil partner, or dependent child. However, this survivor’s pension will be subject to taxation at the beneficiary’s marginal income tax rate.

If you have already retired when you pass away, a defined benefit pension generally continues to provide a reduced pension to your spouse, civil partner, or other eligible dependents. The specific criteria for classifying someone as a dependant and the conditions for receiving death benefits payments are typically more stringent than a personal pension, as defined by the pension scheme rules.


What happens to your State Pension when you die?

The ability to transfer State Pension payments to beneficiaries after death is limited to spouses or civil partners. The key pension rule governing State Pensions about death is determined by whether an individual reached State Pension age before or after the recent changes implemented on 6th April 2016.

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