What happens to your pension when you pass away?

Leaving your pension as part of an inheritance could be life-changing for your loved ones. Find out what may happen to your pensions when you pass away.

Putting plans in place for when you pass away can be a daunting task. But actually, taking these steps early in life may put your mind at ease over the long term.

And, when you do discuss the subject of inheritance, you may focus on two key things first and foremost: properties you own and your investment portfolio. While both are crucial, you may be missing a key component – your pension.

Indeed, a 2022 study from the Office for National Statistics (ONS), published by PensionsAge, reveals that the UK’s combined pension wealth is worth almost £1 trillion more than our property assets. What’s more, your pensions do not usually form part of your estate for Inheritance Tax (IHT) purposes, so your beneficiaries could potentially inherit your pot IHT-free.

With all this in mind, keep reading to learn what happens to your pensions when you pass away, and how you can prepare this asset to be inherited by your loved ones.

Your beneficiaries may inherit your workplace or private pension

If you have a defined contribution (DC) pension, either as a workplace scheme or private pension pot, this may be accessed by your beneficiaries when you pass away.

To make it easier for your beneficiaries to access the funds held within your pension(s), it’s important to fill in an “expression of wish” form with your pension provider.

Seeing as your pension doesn’t often form part of your estate and is not generally subject to IHT when you die, the expression of wish form is an additional measure that points your provider in the right direction when determining who to pay the benefits to.

Your provider’s trustees are still responsible for releasing the funds to your beneficiaries and will have the final say, even with an expression of wish form in place. But this document can make this decision clearer and easier for them.

Once the funds are approved for release, there are several different ways your loved ones may be able to access the money.

If you haven’t yet accessed your pension, your beneficiaries may be able to choose how they take the funds

If you were to pass away before you had a chance to take your DC pension, your beneficiaries may be able to:

· Take the funds as a lump sum

· Buy an annuity

· Choose flexi-access drawdown.

This said, your beneficiaries’ options will entirely depend on the type of DC pension you have. Some workplace pensions have certain stipulations about how the pension is passed down, for example.

If you’ve taken your pension flexibly, there are several options for your beneficiaries to consider

If you’ve already accessed your pension flexibly, your beneficiaries may be able to continue taking it in the same way – but this depends on the provider’s regulations.

Alternatively, those inheriting the pension could take the remaining amount as a lump sum, or purchase an annuity if they wish.

It’s important to bear in mind that your beneficiaries may have to pay Income Tax on inherited pension wealth if you are over age 75 when you pass away. If you are under 75, they will typically not face this charge.

This will be charged at their marginal rate of Income Tax. This could push them into a higher tax band if they inherit the funds as a lump sum, meaning they may face a charge of 40% or 45% on it.

They may be able to control this charge to some extent if they are dependent or a named beneficiary, allowing them to keep the wealth within the pension wrapper.

You may want to tell them about this ahead of time and suggest that they take advice, so they can manage any pension inheritance as tax-efficiently as possible.

If you’ve bought an annuity with your pension, your loved ones may continue to receive the funds, depending on the agreement

If you bought a single life annuity with your pension, payments may stop altogether when you pass away depending on the specific benefits associated with the type of annuity you bought.

Alternatively, a “joint life annuity” agreement is likely to continue paying a proportion of this income to your beneficiary (usually a spouse or partner).

Another aspect of accessing a private pension after the pension holder dies is protection. Some annuity options, for instance, have protection options included in the agreement.

If you’re unsure, contact your pension provider for more information about how your beneficiaries can access it when you pass away.

Your defined benefit pension could be paid out as a lump sum upon your death, but rules vary between schemes

If you’re part of a defined benefit (DB) pension scheme, also known as a “final salary” scheme, your loved ones could receive payment in various forms when you pass away. These include:

· A death in service benefit, designed for individuals who pass away while they’re still paying into the scheme. This is usually paid as a lump sum.

· A refund of contributions, which is also often paid to beneficiaries of scheme members who haven’t yet taken their pension.

· A pension protection lump sum, which places a guarantee on DB pensions that are already being paid out. Your beneficiaries could receive a lump sum if you passed away before the guarantee period ends.

· A trivial commutation lump sum death benefit, which offers a lump sum payout rather than income, and is typically used for small pension pots of £30,000 or less.

As there are a number of ways to inherit a DB pension, it may be helpful to contact your pension scheme’s administrator to find out exactly what your beneficiaries are entitled to, and how it may be paid out.

Your spouse or civil partner could receive a portion of your State Pension benefits when you die

In many cases, once a person dies, the government ceases their State Pension payments altogether.

In some instances, though, if you receive the basic State Pension (that is, you’re a man born before 6 April 1951, or a woman born before 6 April 1953) then your spouse or civil partner could begin receiving half of your State Pension benefits, known as an Additional State Pension.

Firstly, only spouses and civil partners can inherit a State Pension entitlement. Whether or not they may receive your Additional State Pension depends on when you reached retirement age and when you were married.

Your spouse or civil partner may receive your Additional State Pension when you pass away if:

· You were married or had a civil partnership before 6 April 2016

· You reached State Pension Age before 6 April 2016.

If you do receive their entitlement, it will be paid at the same time as your State Pension. In some circumstances, you could also receive a lump sum.

Get in touch to work with a financial planner who can help you leave a lasting legacy

Leaving a legacy to your loved ones can sound like a Herculean task – but with expert guidance, you’ll feel more at ease about setting your beneficiaries up for the future.

We can go through your pension circumstances, help you fill in an expression of wish form, and discuss the inheritance of a pension and other assets with you and your family. What’s more, we can talk your loved ones through the tax implications of inheriting your pension, if there are any to consider.

To find out more about how our award-winning financial planners can help you, email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.


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