Pension rules after death

After passing away, your civil partner, spouse, dependents or other beneficiaries may have the right to inherit your pension. Indeed, specific rules and regulations on pension death benefits determine who gets to inherit your pension. The pension death benefits are also heavily influenced by your age and the type of pension.


What happens to your pension when you die?

In 2015, new pension rules were introduced governing everything from how you access your pension to what can happen to your pension pot after you pass away. Pensions are considered to sit outside your estate, which means that when you pass away, your beneficiaries can access your retirement savings without having to pay inheritance tax.

Nowadays, almost all private and workplace pension schemes offer death benefits. Therefore, if you die, your beneficiaries need to get in touch with your pension provider.

What happens to your private pension when you die?

There are three main options your beneficiaries can consider;

  1. Withdraw all the money as a lump sum – this may be taxable depending on the age at which you die, and whether you had already started drawing an income.
  2. Purchase an annuity with the proceeds to provide them with a guaranteed income.
  3. Set an an Income Drawdown policy in their own name, and take the benefits in a flexible manner.

Defined contribution pensions

Pension Death

Key factors that influence how your beneficiaries can access your pension are the age at which you pass away and whether you started drawing pension money.

If you pass away before the age of 75 years and have not made any withdrawals at all, your beneficiaries will be able to inherit 100% of your pension pot free of tax. This can either be in the form of a lump sum, or they could choose to purchase an annuity, or invest it in a drawdown contract.

If you pass away before 75 and you were already drawing from your pension scheme, your beneficiaries can take the remaining money left as a lump sum (taxable), set up a guaranteed income (an annuity) with the proceeds or, they may also be able to continue with a drawdown contract in their own name.

If you have already purchased an annuity, then depending on the options you chose when you set it up, will determine what your beneficiaries can receive. If the annuity was based on a single life, with no guarantee periods, then the payments (and any underlying value) will cease on death. If you chose to include a spouse’s pension, then that will continue to be payable to your spouse. If you chose a guarantee period, and die within the period, then the balance of the guarantee will be paid. There are many options, which can be complicated, and it is always best to seek advice from a financial adviser.

You need to inform your pension administrator about your beneficiaries, along with their contact details. This way, you can ensure that your pension is successfully passed on to them after your death.

Defined benefit pensions

These pensions are governed by different rules. The main factor that influences your death pension is whether you had already retired before death.

If you die before retiring, your beneficiaries will receive a single lump sum often valued at two to four times your wages. Your beneficiaries would get a tax-free payment if you were not older than 75 at the time of your death.

If you were retired at the time of your death, if the pension contains provision for a spouse, civil partner or dependent, then a (usually reduced) pension will be paid to them . There are strict scheme rules that determine who can be considered a dependant and who may receive a death benefits payment.

What happens to your state pension when you die?

You can pass State Pension payments only to a civil partner or a spouse after death. In this case, you need to consider if you were retired before April 6th, 2016, or after that period. That’s when a set of new pension rules were introduced.

If you reached the government-approved pension age before April 6th, 2016 and receive the Basic State Pension, your civil partner or spouse will be able to make a claim on your Additional State Pension. The additional state pension is dependent on your record of National Insurance Contributions. If you got to a state pension age after April 6th, 2016, your civil partner or spouse will be eligible for the “new state pension.” On top of that, your civil partner or spouse might also be eligible for additional payment.

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