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.
If you reached the State Pension age BEFORE 6th April 2016
Individuals who reached State Pension age before 6th April 2016 and currently receive the Basic State Pension, their spouse or civil partner can claim the Additional State Pension based on their National Insurance Contribution record. In certain circumstances, passing on a lump sum from the State Pension upon death may be possible, and the surviving spouse or civil partner may be eligible for bereavement benefits.
If you reached the State Pension age AFTER 6th April 2016
For individuals who reached State Pension age after 6th April 2016 and are entitled to the new State Pension, their spouse or civil partner might have the opportunity to receive an additional payment in addition to the regular pension amount as an inheritance.
