What happens to my pension when I die?

What happens to my pension when I die?

Lots of people wonder “who gets my pension if I die”. There’s no simple answer to this because pensions vary so much. When you die your spouse, partner or other beneficiaries may be entitled to benefits, but how this works depends on the pension type.

There are two main types of schemes: money purchase (or defined contribution) schemes including personal pensions and SIPPs, and defined benefit schemes such as final salary schemes, and their treatment on death is different.

What happens to your private pension when you die?

If you die before you reach age 75, the value of your money purchase pension fund, such as a personal pension or SIPP, would be payable either in the form of a cash lump sum or as an income to the beneficiaries you choose. 

Any payments can generally be income tax free provided the ‘lump sum and death benefit allowance’ has not been exceeded. This limits the amount of tax-free lump sum that can be paid both in lifetime and on death and is currently set at £1,073,100.

You can indicate your beneficiary or beneficiaries for your private pension by completing an ‘expression of wish’ or ‘nomination of beneficiary’ form when you open it or at a subsequent time. It’s important to keep this up to date with your wishes.

If you die on or after your 75th birthday, the pension benefits can still be paid as a cash lump sum or as an income, but whoever receives them will have to pay income tax at their marginal rate on what they receive. 

Alternatively, whatever age you were on date of death, it is usually possible for the beneficiaries to continue with the pension pot without taking any income or lump sums. 

Currently, there is no inheritance tax (IHT) to pay when passing the pot on, but this is set to change from April 2027 when pension pots will be included in the value of an estate. Therefore, there may be IHT to pay on your pension depending on the overall size of your estate.

Find out more: inheritance tax planning requires a rethink

What happens to your defined benefits pensions when you die?

A defined benefit pension scheme is one where your retirement benefits are based on how many years you’ve worked for your employer and how much you have earned. These schemes usually provide death benefits in the form of a cash lump sum, which will often be a multiple of your salary, if you die before pension age. 

If you die after you have started to receive your pension, a surviving spouse, partner and any dependent children will often receive a proportion of your pension until they die. However, the specific amount and eligibility will depend on the scheme’s rules, which should be set out in the relevant member booklet. Like the lump sum this can vary from scheme to scheme and there may be conditions attached, so it is worth taking a detailed look at the booklet to calculate what your family would be entitled to. Any survivors or dependents pension will be subject to income tax. 

What happens to an annuity in payment when you die?

A lifetime annuity is a regular, guaranteed income for life that can be purchased from an insurance company using all or part of your money purchase pension funds.  However, it involves giving up the capital value of your pot and, depending on the type of annuity you choose, the death benefits tend to be less attractive or less flexible than with drawdown.

The death benefits are fixed at the point you buy the annuity, and income will stop on death unless specific options to protect the income or purchase price have been selected at the start. The main options for this are a dependant’s pension, whereby annuity payments will continue to be paid at the level you choose to a surviving spouse or civil partner until they die, and a guarantee period, which means that even if you die early in retirement, the annuity will continue to pay out for a minimum period (usually five or ten years).
Outside of these optional death benefits, access to your pension capital is lost, and once set up a standard lifetime annuity cannot be changed or cancelled, so it's important to choose carefully. 

What happens to my State Pension when I die?

Again, it is not a simple answer – this time because the rules changed and it depends on whether you reached State Pension age before or after 6 April 2016.

Under the ‘old’ basic state pension system, your surviving spouse or civil partner can make a claim based on your National Insurance record if they aren’t already entitled to a full state pension themselves. Any ‘Additional State Pension’, a top up to the basic state pension based on earnings, can generally be inherited at the rate of 50% or more depending on age.

The ‘new’ system operating from retirements from April 2016 is based on individuals, which means the amount that can be ‘inherited’ is far more limited. If the late spouse got more than a full new state pension owing to additional state pension built up in the past, the surviving spouse can receive half of that excess known as a 'protected payment'.

You can find out more about what you can inherit from your spouse’s State Pension using the government’s tool on the Gov.uk website here.