What Happens To Your Pension When You Die?

  • Woman sitting on a park bench, wondering what happens to your pension when you die

What Happens To Your Pension When You Die?

Pensions are a crucial part of your retirement planning. They offer a source of income in your later years, allowing you to maintain your standard of living even after you’ve stopped working. However, it’s important to consider what happens to your pension when you die.

Pensions are not typically covered by your will as they are generally considered a separate legal entity that is not part of your individual estate. So you will need to ensure that your pension provider scheme administrator knows who your chosen beneficiaries are.

In this article, we’ll take a closer look at what pension death benefits are and who inherits them when you pass away.

Pension Death Benefits

The pension death benefit refers to the amount of money paid to beneficiaries from your pension plan after you die. It can be in the form of a lump sum payment, an annuity, or other payment arrangements.

What happens to your death benefits when you die depends on the type of private pension or workplace pension you have and whether you die before or after you start receiving income from your pension savings.

Types of Pension

1) Defined Benefit Pensions

Defined benefit pensions are typically offered by employers. They promise a set income for life, based on factors like your final salary and years of service.

In some cases, the pension plan scheme may provide for a lump sum payment to be made to the beneficiary or beneficiaries named by the pensioner before their death. This lump sum payment is typically a multiple of the pensioner’s annual pension, such as two or three times their annual pension.

In other cases, the scheme rules may provide for a spouse’s or partner’s pension to be paid to the pensioner’s spouse or partner after their death. This would typically be a percentage of the pensioner’s pension and may be paid for the rest of the spouse’s or partner’s life.

Dependant’s Pension Schemes

This type of final salary / defined benefit scheme will only pay out to a dependant of the scheme member. For example:

  • widow(er) or civil partner

  • children under the age of 23

  • an adult child, who continues in further education or is a dependant due to physical or mental impairment

  • anyone else considered dependent at the time of death, e.g. unmarried partners or disabled relatives

Payments under these pension schemes generally cease once the beneficiary is no longer considered dependent. e.g. remarrying, entering into a new civil partnership, or due to age.

It is essential to note that defined benefit pension plans can differ, and the benefits paid out upon death vary considerably. Some plans may provide a more generous death benefit, while others may not provide any benefits at all. Therefore, it is crucial to read the terms and conditions of the plan carefully to know what benefits your beneficiaries will receive upon your death.

2) Defined Contribution Pensions

A defined contribution scheme pension is more flexible.

They allow you to contribute a set amount of money each year, which is then invested to generate returns. The amount of income you receive in retirement depends on how much you’ve contributed and how well your investments have performed.

Unlike many other investments, this type of pension is not part of your taxable estate and therefore isn’t normally subject to IHT.

Keeping your pension wealth within your pension fund and passing it down to future generations can be very tax-efficient estate planning.

With defined contribution pensions, your pension savings will be passed on to your beneficiaries. Your beneficiaries may be able to take the money left as a lump sum or use them to purchase an annuity to provide a regular income.

quote about a defined contribution pension

Another option available is to take the funds as a drawdown pension. This allows them to withdraw a regular income from the pension pot while leaving the remainder invested. However, they will need to pay income tax on the withdrawals, and there may be tax implications for the rest of the pension pot as well.

If someone dies before the age of 75, their beneficiaries can receive the pension payments tax-free, provided that the pension scheme allows for this. This is because the UK government abolished the 55% tax charge on pensions that were passed on to beneficiaries before the age of 75 in 2015.

If someone dies after the age of 75, their beneficiaries will have to pay tax on the pension payments they receive. The rate that is applied will depend on the individual circumstances of the beneficiary, such as their income and income tax bracket.

If you have a defined contribution pension, you may need to complete an ‘expression of wish’ form (see below).

3) The UK Basic State Pension

The current UK state pension age for both men and women is 66 but it’s set to gradually increase from 6 May 2026.

The rules around inheriting State Pension can be complex and depend on individual circumstances:

If someone dies before they’ve reached state pension age

Any National Insurance contributions paid will not be taken into account, and there will be no State Pension to inherit.

If someone dies after they’ve reached state pension age

  • If the person who dies was already receiving the State Pension

    Your spouse or civil partner may be eligible to receive an increase in their own State Pension, based on their late partner’s National Insurance contributions. This is called a ‘bereavement benefit’, and there are different rates depending on the age of the person who died and the age of the beneficiary.

  • If the person who died had not yet claimed the State Pension

    Their surviving spouse or civil partner may be eligible to claim a portion of their late partner’s State Pension. This is called a ‘bereavement allowance’ and is available for up to 52 weeks after the death.

Note: Your National Insurance contributions impact the amount of State Pension you’ll receive and the pension entitlement after your death. The more contributions you make, the higher your pension entitlement will be, and the greater the likelihood that your spouse will continue to receive payments after your death.

For more information about the state pension rules see: The Ultimate Guide To The UK State Pension

Making Sure Your Pension Goes to the Right Person

To ensure that your pension pot goes to the right person(s), make sure to keep your beneficiary details up to date. This is especially important if you have gone through a divorce, remarriage, or have additional children or anyone else who is financially dependent on you.

An “Expression of Wish form” is an essential document that lets you choose who you would prefer your pension money to go to and in what proportions. This form is typically provided by your pension provider or employer and ensures the pension scheme administrator acts in accordance with your wishes.

It’s important to note that if you don’t have a designated beneficiary or your beneficiary dies before you do, your pension benefits may be paid to your estate instead of to a specific person. This could lead to delays in distribution and may also result in the pension money left being subject to inheritance tax.

2 people looking at a pension expression of wish form

Losing a loved one is an emotional and challenging experience, but it can be even more difficult when you die without a designated beneficiary for your pension benefits, or the beneficiary dies before you do.

The legal process to determine who is entitled to receive any of the pension money can be lengthy and costly, leaving your surviving relatives struggling to financially in the meantime.

Additionally, without a designated beneficiary, any pension benefits available are paid to your estate. This can change the tax treatment meaning the money left could also be subject to inheritance tax, further reducing the amount available.

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Other Factors To Consider

Age and Health of the Beneficiaries:

The younger the beneficiary, the longer they may receive pension payments, and the greater the potential the payments will be reduced due to inflation.

Joint Pension Plans:

If you and your partner have a joint pension, it’s important to consider the impact of one person’s death on the pension entitlement. Generally, joint pensions provide a higher level of security for the surviving partner, but the level of pension entitlement may reduce compared to individual pensions.

Pensions and Inheritance Tax:

Pensions are generally not subject to inheritance tax, making them a useful tool to minimize IHT for high net worth individuals.

As well as completing the expression of wish form, you can consider establishing a trust to handle your pension assets which can provide you with greater control and benefits for your beneficiaries, while reducing the risk of having to pay inheritance tax.

In Summary

It is crucial to understand your pension scheme rules and what happens to your own pension savings when you die.

  • Do you remember filling out a form to express your wishes?

  • If yes, have your personal circumstances changed precipitating the need to update it?

Please make time to check your wishes have been lodged with your pension scheme administrator and they accurately reflect your current situation.

If you would like to ensure your pension plan aligns with your goals and provides the greatest possible benefit to you and your beneficiaries, we recommend speaking with a financial adviser about your retirement planning.

Book an appointment using the button below, or email to tony@ttwealth.co.uk

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