Having worked most of your life to build up your Pension Pot, its value can be significant by the time you reach your retirement years. So, it is very common for Clients to ask us what will happen to the residual value of their Pensions when they die.
Your Pensions are passed onto your beneficiary when you die. However, how much of the residual value left in your Pension Pot your beneficiaries will receive depends on the type of retirement planning you have in place.
Read on to find out more about Pensions after death…
What happens to your State Pension after death?
If you leave a surviving spouse or civil partner when you die, they may be entitled to additional payments from your State Pension. However, this will depend on when each of you reached the State Pension age and on the amount of National Insurance contributions you both made.
The surviving partner has a legal obligation to inform the Department of Work and Pensions immediately upon the death of their spouse or civil partner, so they can stop making payments.
Once the death has been reported to the Pension Service, and they have received the relevant information required to access a claim, they will confirm if any additional Pension payments are to be made.
Inheriting or increasing State Pension from a spouse or civil partner
You might be able to inherit an extra payment on top of your new State Pension if you’re widowed.
You will not be able to inherit anything if you remarry or form a new civil partnership before you reach State Pension age.
Inheriting Additional State Pension
You might inherit part of your deceased partner’s Additional State Pension if your marriage or civil partnership with them began before 6 April 2016 and one of the following applies:
- Your partner reached State Pension age before 6 April 2016
- They died before 6 April 2016 but would have reached State Pension age on or after that date
It will be paid with your State Pension.
Inheriting a protected payment
You’d inherit half of your partner’s protected payment if your marriage or civil partnership with them began before 6 April 2016 and:
- Their State Pension age is on or after 6 April 2016
- They died on or after 6 April 2016
It will be paid with your State Pension.
Inheriting extra State Pension or a lump-sum
You may inherit part of or all of your partner’s extra State Pension or lump sum if:
- They died while they were deferring their State Pension (before claiming), or they had started claiming it after deferring
- They reached State Pension age before 6 April 2016
- You were married or in a civil partnership with them when they died
If you get divorced or dissolve your civil partnership
The courts can make a ‘pension sharing order’ if you get divorced or dissolve your civil partnership.
You’ll get an extra payment on top of your State Pension if your ex-partner is ordered to share their Additional State Pension or protected payment with you.
Your State Pension will be reduced if you’re ordered to share your Additional State Pension or protected payment with your partner.
What happens to your Private Pension after death?
If you have a Personal or Workplace Pension, it is essential that your beneficiaries know where to find the documents and details relating to these policies. They will need to contact the Pension Provider to find out how much you had in your Pension Scheme and to find out what they as potential beneficiaries need to do next.
Defined Contribution Pensions
The tax rules that apply to a Defined Contribution Pension differ from those applied to other Pension schemes.
Two scenarios apply in the case of Defined Contribution Pensions:
whether you died before you turned 75 years of age or after.
If you die before your 75th birthday:
- Income from a Single Pension will stop unless there is a ‘guaranteed period’ included in the terms and conditions of the scheme. If there is a guaranteed period, the Pension will be paid to your beneficiaries until the end of that period. The recipients will pay Income Tax at their personal tax rates on those payments.
- If you held a Joint Pension scheme, the income would continue to be paid to your surviving partner until their death; usually at a reduced rate. This will be tax-free
- If you had a ‘Flexi Access Drawdown Pension’ and it was set up or first accessed after 5 April 2015, then any money paid within two years of your death will be paid tax-free
- Should a beneficiary claim a Pension more than two years after your death, there may be a tax liability payable
If you die after your 75th birthday:
- Income from a Single Pension will stop unless there is a ‘guaranteed period’. If this is the case, the Pension will be paid to your beneficiaries until the end of that period, and the recipients will pay Income Tax on their personal tax rates on those payments.
- If you held a Joint Pension scheme, the income will continue to be paid to your surviving partner until their death, and the recipients will pay Income Tax at their personal tax rates on those payments
Defined Benefit Pensions
If you hold a Defined Benefit Pension, its treatment will depend on whether you are retired or still working when you pass away.
If you were not retired at the point of your death:
- Most schemes will make a lump sum payment on death. This would usually be between two to four times your annual salary.
- If you are under 75 when you die, this lump sum is generally tax-free
- It is also common for these schemes to include a ‘Survivor’s Pension’ clause, which is usually also payable to your spouse, civil partner or dependent child
If you were retired at the point of your death:
- Your surviving spouse, civil partner or other dependents will continue to receive a reduced Pension payment until they die
The exact benefits vary from scheme to scheme. You or your Pension beneficiary can check your Pension death benefits, scheme rules, and what happens to your Pension savings with your Pension scheme administrator.
How are Lump Sums treated?
If you have completed an Expression of Wish document or had a Will created, you will most likely have nominated one or more Beneficiaries that you want to benefit from any lump sum payment. This is typically the case with a Defined Benefit Pension scheme, and the scheme provider may pay this to a specific person (or people).
If you have not completed an Expression of Wish form or named any Beneficiaries, the Pension scheme provider will decide who will receive any lump sum and Survivor Pension. This is usually decided after your next of kin have completed a claim form providing details of your family and any dependents you had.
The advantage of this type of payment is that it will go directly from the Pension scheme to your family, without becoming part of your Estate. In addition, this means that your Beneficiaries will not usually have to pay Inheritance Tax on the lump sum payment and can be dealt with more quickly than the other assets within your Estate, such as property.
If you did not name any Beneficiary, failed to complete an ‘expression of wish’ form, and did not have any dependents, the lump sum will usually be paid to your Estate. Depending on the value of your overall Estate, it could then be liable for Inheritance Tax and will be passed on according to your Will if you left one, or worse still, it could be subject to the Rules of Intestacy if no Will was left.
If you have not yet completed an Expression of Wish, or you need to update it, speak to your Pension Provider. If you have yet to put a Will or any form of Estate Planning in place, we recommend you seek professional advice as early as possible to ensure there is clarity for any Pension beneficiary about what happens to your Pension when you die. Speak to our Pension Advisors today and find out more about our Pension Advisory Service here.
The lifetime allowance is the amount of money you can pay into a Pension over your entire lifetime. The annual allowance is the amount you can pay in each year and still receive tax relief on contributions.
If the combined value of any Pension when you die exceeds the ‘lifetime allowance’, tax may be payable on the Pension savings that are inherited by your Beneficiaries.
The lifetime allowance limit is currently £1,073,100 million. (Correct as of March 2022)
The lifetime allowance has been an easy target for successive Governments to increase tax revenues through. Since 2008 the lifetime allowance has dropped by over 40%, from £1.8m, while the annual contribution allowance has dropped from a £255,000 cap.
Nominating a beneficiary
You have worked hard over your lifetime to create your State Pension and, most likely, your Private Pension wealth. So, you will want to ensure that any benefits to be derived from your Pension after your death is maximised for those who were financially dependent on you in life and that they are protected from any unnecessary Inheritance Tax.
Make sure you complete an Expression of Wish form and log it with your Pension Scheme provider. If you have any significant changes in circumstances, such as a divorce, remarriage or death of a Pension beneficiary, make sure your Expression of Wish is updated to reflect your latest wishes.
An essential part of protecting your assets is making a will for those you leave behind. For example, if you have dependents, you could set out what your wishes are for them in the event of your death, including naming those you wish to be their guardian.
Over 60% of adults in the UK do not currently have a Will. This means that well over 30 million people run the risk of having their Estates distributed according to the Laws of Intestacy. That means the Government decides who inherits your Estate and in what proportions.
As soon as someone turns 18 they should really consider having a Will. While they may not yet have amassed a big Estate, they could well have young dependents who will need guardianship in their absence, some wealth, as well as physical and digital assets.
Does a Pension go to the next of kin?
This is usually decided after the next of kin has completed a claim form providing details of your family and any dependents you had. The advantage of this type of payment is that it will go directly from the Pension scheme to your family, without becoming part of your Estate.
How long is a Pension paid after death?
This will depend on the type of Pension you had in place before death and if any payment guarantees were included. Refer to your Pension paperwork or speak to the Pension Scheme provider.
Do beneficiaries pay tax on Pension?
This will depend on a number of variables, including the type of Pension Scheme held, the way it was shared out and the Beneficiaries own tax status. Speaking to Financial Planning experts like Redwood can help to protect your legacy and beneficiaries of your Pension when you die.
As with most matters relating to Financial Planning, the key is arming yourself with knowledge about your options and some good old fashioned pro-active planning.
Whether you have Defined Benefit Pensions, Defined Contribution Pensions, a Pension Annuity, a State Pension or any other kind of Pension Plan, you can take action to protect your nominated beneficiaries from unnecessary stress, worry and taxation.
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