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 die. Pensions are considered to sit outside your estate, which means that when you die your beneficiaries can access your retirement savings without having to pay inheritance tax.
Most workplace and private pension schemes provide death benefits and, in the event that you pass away, your beneficiaries should contact your pension scheme administrator for more information. If you’re already drawing your State Pension when you die, your pension beneficiary should contact the Pension Service.
What happens to your private pension when you die?
If you’re part of a workplace pension scheme or have set up your own pension, such as a SIPP or self employed pension, you’ll have what’s known as a private pension. There are two main types, defined contribution pensions and defined benefit pensions. The type you have will determine how much of your pension your beneficiaries can claim and when they can claim it in the event of death.
Defined contribution pensions
The main pension rule governing defined contribution pensions in death is your age when you die and whether you’ve already started drawing your pension.
If you die before your 75th birthday and haven’t started drawing your pension it can be passed to your beneficiaries tax-free. In this scenario, private pension payments after death can be taken as a lump sum, invested in drawdown or used to purchase an annuity. Your beneficiaries have two years to claim a death pension, after which point tax may be charged.
If you die before your 75th birthday, but have already started drawing your pension, the way you have chosen to access your savings will determine the action your beneficiaries can take. If you’ve withdrawn a lump sum and you have remaining cash in your bank account outside your pension, this will be counted as part of your estate, but if you’ve opted for drawdown your beneficiaries can access whatever’s left in your pension entirely tax-free. This can be via drawdown payments, a lump sum or buying an annuity.
An annuity after death is a little more complicated. If you have already started receiving income from an annuity before you die, usually this cannot be passed to a beneficiary. There are certain types of annuities that are eligible for pension transfer after death including joint life, value protected and guaranteed term annuities. If you have any of these annuities your beneficiaries will be able to receive your future payments tax-free, however some conditions may apply and your beneficiaries should contact your annuity provider for further information.
If you die after your 75th birthday your beneficiaries will need to pay income tax on any pensions you leave behind. This will be charged at their marginal rate of income tax and a large lump sum death benefit, for example, could push them into a higher tax bracket.
For many pensions, the decision on where benefits are paid upon death ultimately rests with your provider. However, your provider will be guided by your nomination(s) as to who benefits should be distributed to. To ensure your wishes are known, it’s important to let your pension provider know the contact details of your nominated beneficiaries. It’s also important you regularly review your nomination(s) in case any of your personal circumstances change. If you’re a PensionBee customer you can do this in just a few clicks in your BeeHive (your online dashboard).
Defined benefit pensions
Defined benefit pensions work a little differently as their value is linked to your salary and how many years you’ve worked for your employer. The main pension rule governing defined benefit pensions in death is whether you were retired before you died.
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 for your beneficiaries. Defined benefit pensions also usually pay what’s called a ‘survivor’s pension’ to either a spouse, civil partner or dependent child, but this will be taxed at their marginal rate of income tax.
If you have already retired when you die a defined benefit pension will usually continue paying a reduced pension to your spouse, civil partner or other dependent. The scheme rules will define who is classed as a dependant and are usually much stricter on who may receive a death benefits payment compared to a personal pension.
What happens to your State Pension when you die?
It’s possible to pass on your State Pension payments after death but this can only go to your spouse or civil partner. The main pension rule governing State Pensions in death is whether you reached State Pension age before or after recent State Pension changes came into effect on 6 April 2016.
If you reached State Pension age before 6 April 2016 and receive the Basic State Pension, your spouse or civil partner can claim your Additional State Pension, which is based on your National Insurance Contribution record. In some instances it may be possible to pass on a State Pension lump sum on death and your spouse or civil partner could qualify for bereavement benefits.
If you reached State Pension age after 6 April 2016 and (will) receive the new State Pension, your spouse or civil partner may be able to inherit an extra payment on top of your pension.
Add beneficiaries easily with PensionBee
If you have a PensionBee pension, you can simply go to your profile section in your online BeeHive to add or update your beneficiaries.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 31-05-2024
