Life is unpredictable, and sometimes, people pass away earlier than expected. In such unfortunate circumstances, it's essential to understand what happens to your pension and how your loved ones can benefit from it.
When you die, your spouse, civil partner or beneficiaries may be able to access your pension, but the rules will vary depending on the type of pension you have and your age when you pass away.
Here are some common scenarios:
If you’re part of a workplace pension scheme or have set up your own pension, such as SIPP or a self-employed pension, then you’ll have a ‘private’ pension. There are two main types: defined contribution pensions and defined benefit pensions.
If you have a defined contribution plan and you die before your 75th birthday and you haven’t started drawing your pension yet, it can be passed to your beneficiaries tax free. They have two years to claim a death pension; from then, tax may be charged.
If you’ve started drawing on that money, and you’ve drawn a lump sum, this will be counted as part of your estate. But if you’ve taken drawdown, your beneficiaries can access whatever’s left in your pension tax free.
Annuities are a little different: if you’ve already started receiving income from an annuity before you die, this generally can’t be passed to a beneficiary, however there are certain types of annuities that are eligible for pension transfer after death, including ‘protected’ annuities.
With a defined benefit plan, your pension benefits are typically based on a formula that considers your years of service and salary. If you die before you retire, your pension will pay out a lump sum worth two to four times your salary. If you’re younger than 75 when you die, this payment will be tax-free. The plan may also offer ‘survivor’ benefits to your spouse or designated beneficiary.
If you’ve already retired when you die a defined benefit pension will usually continue paying a reduced pension to your spouse, civil partner or other dependent.
Your State Pension will normally stop being paid when you die. But sometimes, your husband, wife, or civil partner could inherit some of it. This depends on the amount of National Insurance contributions you both made and when you both reached, or were due to reach, State Pension age.
You may be able to get War Widow’s or Widower Pension if your husband, wife or civil partner died because of their service in the Armed Forces or because of a war. They must have served before 6 April 2005, but you may be eligible if they died of an illness or injury later.
While it's unsettling to think about the possibility of early death, understanding what happens to your pension in such circumstances is crucial for comprehensive financial planning.
It’s important to review your pension plan documents and to keep your beneficiary designations up-to-date to ensure that your pension benefits are distributed according to your wishes in the event of your passing.
Additionally, estate planning can play a significant role in how your pension assets are distributed after your death. We’d be more than happy to chat to you about this, so please get in touch if you’d like to discuss this further.
You can book an online meeting with one of our advisers at your convenience here.
