Pension savings piggy bank

‘Kelly’s Know-how’ – December 2020 edition

What happens to my pension after my death?

Last month we talked about the different types of the pensions and their features.

One question we often get asked is, “What happens to my pensions when I die?”

Again, there are different rules relating to the different types of pensions.

With Final Salary pensions, those that pay an income for the rest of your life, the pension scheme may pay a lump sum death benefit and/or a percentage of your pension income to your dependents. They will usually pay a reduced pension to your spouse or partner – this is normally around 50% but some may pay up to two-thirds.

Today we are going to concentrate on the death benefits relating to defined contribution pensions.

This type of pension is just a pot of money that you can use yourself or leave to your loved ones. If you have other assets available, leaving the pension pot untouched for the next generation is a great of way succession planning because money in the pension is usually outside of your estate for inheritance purposes.

When a member of a defined contribution pension scheme dies, the scheme administrator has to pay the death benefits to someone. The process of choosing who the beneficiaries should be can either involve the scheme administrator using their discretion, or the member directing the choice before their death.

If you specifically nominate the beneficiaries and do not let the scheme administrator use their discretion, the money in the pension forms part of your estate.

If you fill the expression of wish form and let the scheme administrator use their discretion, then the money in the pension is normally outside of your estate. The latter is normally the preferred way.

Another factor of how the money is paid out depends on the age of when the member dies.

Death before 75

If the member dies before age 75 and the scheme administrator has been notified within 2 years from the date of death, the pension fund can be paid to the beneficiaries without being subject to income tax.

The beneficiaries have these options:

  • Get the money as a lump sum
  • Use the money to buy an annuity
  • Leave the money in drawdown and take money as and when necessary as lump sums or income.
  • Leave the money untouched and pass it to the next generation.

In any case, the money paid out would be not be subject to income tax.

Death after 75

If the member dies after the age of 75, or before 75 but scheme administrator is not notified within the 2-year window, then the pension fund is paid out to the beneficiaries. However, this is subject to the recipient’s marginal income tax.

This is a complex topic, and every individual case is different, however the above aims to give you an initial overview of pension death benefits. 

If you have any questions on this topic, or if there is a financial matter that you would like to know more about, please feel free to contact us on the usual details – 0121 705 1000 / info@lucentfinancialplanning.co.uk.