What happens to your pension when you die?

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When you die your spouse, civil partner or beneficiaries may be able to access your pension. The rules for pension death benefits will vary depending on the type of pension you have and your age when you pass away.

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.

What happens to my private pension when I die?

There are two main types, defined contribution pensions and defined benefit pensions. The type you have will determine how much 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 you:

  1. 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.
  2. 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 If you’ve withdrawn a lump sum and you have remaining cash in your bank account outside your pension, this will be counted as part of your estate, but if you’ve opted for drawdown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.

If you die after your 75th birthday private pension death benefits can be taken as a lump sum, invested in drawdown or used to purchase an annuity. The key difference here being that your beneficiaries will need to pay income tax on any withdrawal. 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.

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.

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 2-4 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

What happens to your private pension when you die?

The rules for pension death benefits will vary depending on the type of pension you have and your age when you pass away. We strongly recommend that these be regularly reviewed to ensure they reflect your current wishes. If you have any questions or want to review your pension plans please let us know.

This content is for information purposes and should not be treated as advice.

Occupational pension schemes are regulated by The Pensions Regulator.

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