What happens to your pension savings when you die?

As the standard lifetime allowance is over £1m most people need not worry about this limit on death benefits.

A key attraction of Self Invested Personal Pensions (SIPPs) and Small Self Administered Schemes (SSASs) is the degree of control you, as member, have over your pension savings.

What happens to your pension savings when you die?

What happens to your pension savings when you die?

But what happens to your pension savings when you die? 

The first point to clarify is that the money should not form part of your estate and so there is no inheritance tax.

The pension scheme administrator (often the trustees or the pension provider) will be responsible for distributing your pension savings to your beneficiaries, bypassing your estate.

You can complete an expression of wishes form or similar which lets the scheme administrator know who you would like to benefit on your death.

It is important that you review this form every few years and update it if there are any changes in your personal circumstances, such as if you have children, your marital status changes or you start drawing benefits.

The second point is that the tax treatment of benefits changes once you start drawing benefits and so it is a good time to reconsider who benefits from your personal estate and who benefits from your pension savings.

If you die before you have drawn any benefits and before age 75, your beneficiaries can be paid from your fund free of tax provided it is paid across within two years and your pension lifetime allowance hasn’t been used up.

As the standard lifetime allowance is over £1m most people need not worry about this limit on death benefits.

If on the other hand you die after you have started drawing benefits (or were aged 75 or over on death) but have funds left in the pension perhaps as you are in income drawdown, the lump sum distribution to your beneficiaries is taxed at 55% regardless of the value of your estate.

The tax rate is designed to encourage ongoing provision of pension income to your dependants rather than lump sum distribution. Your dependants will include your spouse, civil partner, children under 23, or anyone financially dependent on you.

The pension will be subject to income tax and can be provided by way of annuity or income drawdown. The amount of pension will depend on the amount of your pension savings, the age of your dependant and annuity rates available at the time the dependant’s pension is set up.

If you have no surviving dependants or beneficiaries, a lump sum can be paid to a registered charity that you have nominated, tax-free.

The final point is that the options could be limited by how liquid your investments are, and so it is worth thinking about the practicalities whilst you are still alive.

If pension assets are tied up in, say, commercial property, then taking out life cover could provide additional flexibility just at the right time.

Pension & Equity Release

What Is Equity Release?

Equity release is the use of financial arrangements that provide the owner of a house, or other property, with funds derived from the value of the property while enabling them to continue using it.

How Does Equity Release Work?

Equity release is aimed at homeowners aged 55 and over. It allows you to take some of the value of your home as cash.

Pension an Equity Release when someone dies

How does equity release work when someone dies?When you die, your equity release plan is repaid. Your beneficiaries must inform your equity release lender and with a lifetime mortgage they usually have 12 months after your death in which to repay your plan. This is usually through the sale of your property; however it can be by any financial means.

Editorial Note: This content has been independently collected by the EveryInvestor advisor team and is offered on a non-advised basis. EveryInvestor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.
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