Death and taxes are a certainty for us all. Pensions are a long term savings vehicle, typically intended to provide you with funds & maybe an income stream, to support you when you retire. But what happens to your pension when you die?

There are many factors and complications to this and it largely depends on the type of pension you have. Read on to find out more & takeaway actions

There are three primary types of pension. The State Pension, Defined Benefit (DB) pensions and Defined Contribution (DC) pensions.

State pension is a pension paid to you by the government when you reach state pension age, which is 67 at the time of writing. You have to accrue at least 10 years of National Insurance credits to receive anything. It is paid until you die.

DB pensions are linked to employment and like the state pension, pay an income for life, once you reach the normal pension age for that scheme. They are common in the public sector and becoming very rare in the private sector.

DC pensions are essentially a pot of money that you & your employer contribute into, throughout your working life. Once you get to 55 (rising to 57 from 2028) you can access your DC pension(s), whether to potentially take some tax free cash, an income or a mix of both. The main difference between DC & DB / state pensions, is that DC pensions do not provide a guaranteed income for life – it is a pot of money that can support your future.

These three pensions all have different death benefits / options, as briefly outlined below.

Defined benefit (DB) pensions

DB pensions pay an income to the pension member, for the rest of their life, once retired. Each and every DB pension scheme is different. In general, a spouse or civil partner will be entitled to an income, from the pension scheme on your death, typically at a lower value than you were receiving. (e.g. 50% of the members pension) The income payable to the surviving spouse would be taxable, irrespective of your age when you die.

If you are not married or in a civil partnership, things are less clear. It would be appropriate to contact the scheme administrators to confirm the position on your death.

If you die before you receive the pension, a lump sum may be payable and if you die before age 75, this is likely to be tax free. Often this is a return of contributions so can be a small sum in comparison to the benefit expected.

Key takeaways

• Your spouse / civil partner is likely to receive an ongoing pension on your death
• If you’re not married / in a civil partnership, it’s not a certainty
• Ask your pension administrator to confirm the position on your death and check who is a nominated beneficiary

State Pensions

On your death, it is possible that your surviving spouse or civil partner could increase their State Pension. It will depend on many factors, including age, what type of State pension (State Pension or now, New State Pension) they & you receive and the value of state pension you receive too. It will depend on when you started to receive the

Contact the Pension Service to update them on the position and enquire as to what options are available.

Key takeaways

• It’s possible that you could receive additional state pension on the death of a spouse / civil partner
• Contact the Pension Service to update them & enquire of your options

Defined Contribution (DC) pensions

Much of the UK population will have a DC pension which is essentially a pot of money. The member typically has the choice of what they want to do with their DC pension, including taking tax free cash, drawing from the pension flexibly, converting it to an annuity (a fixed income for life) or just leaving it alone.

DC pensions are typically outside of your estate for Inheritance Tax and for many households this is a particular benefit, particularly as house prices make up a significant value of any potentially taxable estate.

It is important to note that the recipients are chosen at the discretion of the pension administrator / trustees. The member can and should nominate who they wish to receive the benefits, which the trustees/administrator will ordinarily take into account.

The tax implications and options to the recipient differ depending on the relationship between the member and recipient, which is typically whether they are a widow or a dependent child under 23.

Options at death typically include

• lump sum
• income drawdown
• lifetime annuity

The taxation of a lump-sum is largely driven by the age of the pension owner, at their death – whether they were above or below age 75.

If they died prior to their 75th birthday, lump sums are ordinarily paid tax free, subject to it being paid within 2 years of the pension administrators being notified of the death and within the members remaining lifetime allowance. Tax charges may apply if these scenarios are not met

If the member dies on or after age 75, lump sums will be taxable at the beneficiary’s marginal income tax rate when drawn.

Generally, an ongoing income can only be payable to a dependent or a nominated beneficiary so if this option is preferred then the individual beneficiary should be listed on any nomination put in place. In our experience this is the biggest downfall of any completed pension nomination forms.

A lifetime annuity can be purchased for a beneficiary, using the pension funds from the deceased member, for someone who seeks a secure income. Taxation again follows a similar trend to above, but are dependent upon specific circumstances.

Lifetime Allowance

The pension belongs to the member and the value is tested against the lifetime allowance on the member at death, therefore the recipient of the pension benefit retains their own lifetime allowance, against which their pensions are tested.

Key takeaways

• Check who your nominated beneficiaries are
• Enquire as to what options are available through your pension
• There are many options and considerations!

Each & everyone has unique circumstances, including unique pensions. The above is intended for general information purposes and not to be relied upon for your circumstances.

Thanks for reading.