What happens to my pension when I die?

But the question many people are unsure of is: what happens to the money held within a pension when you die? You’ll no doubt want to ensure your family can easily gain access to any inheritance without having to jump through too many hoops, and you’ll also need to know exactly how much you’re able to leave them without exposing them to a hefty Inheritance Tax bill.

There are several different types of pension you may have invested in during your lifetime, including workplace (which could be final salary or defined contribution), and private pensions (which will be defined contribution). Each one is different, with varying rules that apply depending on whether you die before or after retirement, or before or after age 75.

These days, most workplace and personal pensions are defined contribution schemes. This means that the amount you receive when you retire depends on how much you’ve invested, how much your employer has contributed, and how your pension portfolio has performed and been managed over the years.

If you die before you retire: The value of your pension savings will usually be paid as a tax-free lump sum to the beneficiary/beneficiaries you have nominated. A beneficiary is the person you have named in your will, or nominated directly with the pension provider, that you want to receive your pension when you die.

If you haven’t named anyone or haven’t written a will, your estate (including your pension) will be distributed according to intestacy rules. This could mean that your legacy doesn’t end up with the people you intended.

For more information: Why Making a Will Matters to Your Family

If you’ve already retired, but die before the age of 75: If you have chosen to draw down your pension but die before the age of 75, your beneficiaries can access the money left in your pension pot entirely tax-free. Although, any money you’ve taken as a tax-free lump sum, and now resides outside your pension, will be treated as part of your estate.

If you die after your 75th birthday: Your beneficiaries will still receive any money left in your pension, but after you reach the age of 75 they will need to pay income tax on the amount they inherit.

If you purchased an annuity: If you decided to use your pension to buy an annuity, or income for life, you cannot usually pass this benefit to a beneficiary upon your death. This income will die with you, and no money will pass to your family.

However, certain annuities are eligible for pension transfer, such as a joint life, value protected and guaranteed term annuities. In which case, your beneficiaries need to get in touch with the annuity provider to find out what they’re entitled to inherit.

A defined benefit pension scheme (commonly referred to as a ‘final salary pension’) is usually a workplace pension arranged by an employer. They are few and far between these days, and most employers no longer offer them because they are too expensive to run. However, many people are lucky enough to still belong to an existing scheme from a previous employer.

The value of a defined benefit pension is linked directly to the salary you were earning at the time, and the number of years you worked for the employer.

If you die before you retire: Generally speaking, your beneficiaries will receive a lump sum worth two to four times your salary, and any eligible beneficiaries will receive a reduced dependant’s pension. If you are under 75, this lump sum will be received tax-free.

If you’ve already retired when you die: The scheme will usually continue paying a reduced pension to your spouse, civil partner or other dependents. However, there are rules around who can be classed as a dependent in these circumstances, which may be much stricter than a personal pension.

When you die, depending on the amount of National Insurance contributions you have made, your spouse or civil partner may be entitled to claim extra payments from your State Pension.

For example, if your spouse reached State retirement age before 1 April 2015, and you have a better National Insurance record than them after you die, your spouse can ask for their pension based on your record instead of their own. They may also be able to inherit some of your additional State Pension if you paid into one.

However, if your spouse or civil partner reached State retirement age on or after 6 April 2016, their State Pension will usually be based on their National Insurance contributions alone.

If you have any questions relating to a pension or inheritance matter, an Amber River financial planner can advise you on your current position and provide guidance on estate planning and inheritance, giving you the peace of mind that loved ones will be provided for if you’re no longer around.