June 3, 2022
Everyone would like to know what happens to their assets when they die. But what happens to pensions when someone dies? Our guide addresses this question, how each pension type is affected, and the tax implications of someone inheriting your pension.
‘What Happens to My Pension When I Die’?
What happens to a pension after death depends on your age and whether you’ve taken money out of your pension or designated beneficiaries. But the most critical matter that can determine the fate of your pension is the type of pension you have.
What Happens to Your Private Pension When You Die
Private pensions are paid out to workers who are a part of a workplace pension scheme or have made contributions to a private pension fund. Consider the following two types of private pensions (defined benefit and defined contribution) and note how they are managed after death.
Defined Benefit Pensions
A defined benefit pension pays a retirement income based on the length of time you were part of a workplace pension scheme and the salary you received. If you’re entitled to a defined benefit pension, you probably wonder what happens to my private pension when I die?
If you’re part of a defined benefit scheme, the money from your pension is paid out to the beneficiaries you’ve listed. Payments are distributed according to the scheme’s rules.
Beneficiaries can include:
- Spouse or civil partner
- Children under 23 and enrolled in full-time education
- Mentally or physically impaired children of any age
- Financial dependents or live-in partner
The pension scheme administrator awards the pension to whoever was listed as a beneficiary, or if you haven’t listed one, it will go to your next-of-kin. The pension paid to the beneficiary is a percentage of the pension you would’ve gotten if you passed away before receiving the pension.
Lump-Sum Private Pension Payments after Death
The beneficiary can receive a lump sum after your death in some cases. Consider the following instances where beneficiaries are entitled to lump-sum payments.
- Death in service: If you die while you’re an active member of the defined benefit scheme, the beneficiary could get a lump sum—a multiple of your salary.
- Refund of member contributions: If you die before drawing your pension, your contributions will be refunded to the beneficiary.
- Pension protection: Most pensions come with a 5 or 10-year guarantee period. If you die during this period, the beneficiary will be entitled to a one-time payment, consisting of the payments you were to receive until the end of the guarantee period.
- Trivial commutation death benefit: What happens to your pension when you die and have just a little left in your pot? If you have less than £30,000, dependents can choose to get this in a lump sum instead of incrementally.
These are all the lump-sum payments dependents may receive from your defined benefit scheme when you die. But keep in mind that each plan is different, and the rules may differ depending on the type of scheme you were a part of.
Defined Contribution Pensions
A defined contribution pension pays a retirement income based on the amount you or your employer contributed to the pension pot and how much this amount grows over time. What happens to this pension when you die depends on your age and whether or not you’ve started drawing your pension. These pensions are also known as ‘money purchase schemes’.
Death Before 75
If you die before you reach 75 years of age and haven’t started drawing your pension, your beneficiaries will inherit your pension tax-free. The pension payments can be taken out as a lump sum to buy an annuity or invest in a drawdown. The tax-free period during which the beneficiary can claim the pensions lasts two years.
So what happens to my pension when I die before 75 but have already started drawing it? This mostly depends on the way you’ve accessed your pension. If you’ve chosen to take it out as a lump sum, the remainder of your pension will be added to your estate and divided per your will. But if you opted for a drawdown, the rest of the pension can be received by your beneficiaries tax-free.
Death After 75
The rules for inheriting a defined contribution pension change if you die after 75. So what happens to a pension when someone dies after 75? In this case, the beneficiary inheriting the pension will be taxed on the sum they receive at the marginal income tax rate. If they receive the remainder of your pension as a flexible retirement income (drawdown), they will be taxed on their income in the tax year it was received. (A final test is done against the lifetime allowance at 75.)
|DID YOU KNOW? The average pension pot in the UK is worth £42,651, while the annual state pension reaches a maximum of £9,627/year. The state and private pension payments combine for an average yearly pension of £12,000.|
|Factors that determine what happens to a pension after someone dies include the age of death, the withdrawn amount of money, and nominated beneficiaries.|
|Defined benefit schemes pay out a portion of the pension to the designated beneficiary.|
|Defined contribution schemes are inherited differently. Death before 75 provides a tax-free inheritance, whereas, after 75, the beneficiary is taxed.|
|The State Pension is no longer paid when someone dies. In very few instances, only a spouse or civil partner can inherit a State Pension.|
What Happens to Your State Pension When You Die?
When you die, payments from your State Pension will cease in most cases. It’s rare for a spouse or civil partner to inherit your State Pension or a portion of it when you die. But the rules for inheriting a State Pension are complex and can vary, depending on what you have built up in your pension and when you reach the State Pension age.
The main factor determining whether a spouse or civil partner inherits a State Pension is the date you reach pension age. (Keep in mind that you’ll need to apply for the State Pension first.) If you had reached the State Pension age before 6 April 2016, you’d get the State Pension under the old rules.
Before April 6th
So what happens to State Pension when you die but have reached the pension age before 6 April 2016? Suppose you’re receiving the Basic State Pension and have reached the State Pension age before this date. In that case, a spouse or a civil partner can apply to claim your Additional State Pension, which is based on your National Insurance contributions.
Additionally, if your National Insurance record is better than your partner’s, they may apply to receive your State Pension instead of theirs. In some cases, it’s possible to leave a State Pension lump sum to a spouse or civil partner. They could also qualify for bereavement benefits.
After April 6th
What happens to a State Pension when you die in the UK but have reached the State Pension age after 6 April 2016? Spouses and partners are entitled to up to half of the Additional State Pension, known as ‘protected payment’. Your partner can either receive your State Pension or extra payment in this case. But if a spouse or partner remarries or forms a new civil partnership before they reach the State Pension age, they won’t inherit anything.
|DID YOU KNOW? The UK government spends 8.4% of the GDP on pensions and is expected to spend 11.4% by 2050.|
Pension Inheritance & Tax
What happens to a pension when you die in regards to inheritance tax? In most cases, pensions are inherited outside your estate and won’t be subjected to inheritance tax. But suppose you want someone to use the tax benefits associated with inheriting your pension. In this case, you must designate one or more beneficiaries via the ‘expression of wish’ form so that the pension scheme administrator can award the proceeds from your pension free of tax.
But what happens to my pension if I die and haven’t nominated a beneficiary? Then, the pension provider retains the right to award the pension to whomever they deem fit—typically, next of kin or dependents. If, however, the pension provider doesn’t have discretion over your pension, then the pension is added to the estate and is subject to tax.
Other Tax Rules
It’s essential to remember that if you’ve taken money out of your pension pot before you die and invested it, the cash you have in your bank account (and any investments) will be regarded as part of the estate and subject to inheritance tax.
You also may be confused about what happens to your pension if you die but have a ‘life cover’ as a part of your pension scheme. In this case, the beneficiary will receive a lump-sum equivalent to two to four of your salaries, tax-free, if you die before 75. And if you started drawing from your pension, the beneficiary will receive a reduced guaranteed income from your pension for the rest of their life, tax-free. Some schemes also grant a taxable ‘survivor’s pension’.
|DID YOU KNOW? More than one-third (35%) of British citizens don’t have a pension, while an additional 36% of the British population claim they don’t know how much they have in their pension pots.|
An essential part of the retirement planning process includes what happens to your pension when you die. Hopefully, our guide has helped you learn what happens with your pension once you’re gone, how your pension type is affected, and what to do to ensure the right person receives your pension.
Most pension plans allow you to select a beneficiary, such as a spouse, partner, or children. But if you don’t designate a beneficiary, the pension provider will choose who receives the pension—typically, a dependent or next-of-kin.
The question ‘what happens to my pension when I die’ is usually asked in view of a spouse. Unless you appoint a different beneficiary or the pension scheme you’re a part of has different rules, your spouse will receive your pension.