After your death, your beneficiaries could inherit the funds without paying inheritance tax. This is due to pension rules established in 2015, that place your pension funds outside of your estate.
Many pensions include death benefits, and these can vary depending on the type of scheme you have and how old you are when you pass away.
What Will Happen to My Private Pension When I Die?
A private pension includes workplace pension schemes or ones set up by yourself, such as a self-invested personal pension (SIPP)1 or self-employed pension. The amount your beneficiaries can claim will depend on the type of pension you have:
Defined Contribution Pensions
A defined contribution pension is amassed over the years through contributions made by you and your employer, investments and tax relief. The amount in this pension is determined by how much is contributed during your career. With this type of pension, how much your beneficiaries will be able to claim after your death is determined by how old you are when you die and if you’ve already started drawing from your pension pot.
In Simple Terms
Should you die before you turn 75, and you haven’t started drawing from your pension, it can be passed to your loved ones tax-free.
In this case, the pension payments after death can be used to purchase an annuity, invested in drawdown or claimed as a lump sum. If the death pension is not claimed in two years, your beneficiaries may be charged tax.
Did You Know?
If you’re not yet 75 at the time of your death but have started to draw from your funds, how you’ve accessed your pension will affect what access your beneficiaries have.
If you’ve taken a lump sum and there is money your bank outside of your pension, these funds will be counted part of your estate.
If you have chosen drawdown, your beneficiaries can access the funds in the pension without paying tax. This can be through a lump sum, purchasing an annuity or drawdown payments.
In case you might be asking yourself, an annuity after you pass away is somewhat more complicated. If you are already receiving an income at the time of your death, is not usually passed on to a loved one.
Some plans are transferable after death, such as value protected, joint life, and guaranteed term annuities. Your beneficiaries will be eligible for tax-free payments from these annuities; however, some conditions may apply.
On the Other Hand
If you die at 75 or older, your loved ones will need to pay income tax on pensions funds you leave them. This is charged at their marginal income tax rate and claiming a large lump sum could move them into a higher tax bracket.
Defined Benefit Pensions
A defined benefit pension is a plan that in which your employer agrees to pay a pension of a predetermined amount, either through a pension payment of a lump sum, based on your salary and the length of time employed.
Defined benefit pensions differently work to contribution benefits. The clause governing defined benefit pensions is whether or not you had retired before you died.
If you die before retirement, your beneficiaries could receive a lump sum of 2 to 4 times your wages. If you’re under 75 at the time of your deaths, this payment should be tax-free. Defined benefit pensions also usually offer a ‘survivor’s pension’ to your civil partner, spouse or dependent child. This payment is typically subject to tax.
However, if you die after your retirement, you defined benefit pension should continue to pay a smaller pension to your partner, spouse or dependent. What beneficiaries qualify for this payment will be specified by your pension scheme’s rules. These rules can often be stricter than those of personal pension schemes.
What Will Happen to My State Pension When I Die?
You state pension payments can only pass to your partner or spouse after your death. The primary rule applied to state pensions is whether you reached state pension age before or after changes to the State Pension came into effect on 6 April 2016.
If you received a basic pension and were State Pension age before 6 April 2016, your civil partner or spouse can claim your Additional State Pension2. Your beneficiary may be able to claim a State Pension lump sum after your death and could be eligible to access bereavement benefits.
If you only reached State Pension age after 6 April 2016 and are still to receive the new State Pension, your beneficiary may be able to inherit your pension as well as an extra payment.
Who is entitled to a pension after death?
The beneficiary can be a spouse or civil partner, a widow/widower, unmarried partner or someone nominated in your will.
Does pension go to the spouse after death?
If the pensioner died before age 75, their spouse could inherit a proportion of their State Pension entitlement.
How long is a pension paid after death?
The retirement pension entitlement for the spouse or civil partner is based on their age when they were widowed.
What pension will my wife get when I die?
If you are already getting a pension, your spouse may be entitled to an additional pension.
Death benefits are available through most private and workplace pension schemes. You should specify to your pension provider who you would like to benefit from your pension in the event of your death. In this event, your beneficiaries should contact your pension provider or the Pension Service.