Most of us hope to live to old age and draw on our state and private pensions for years. But what happens to your pension when you die? Will your loved ones still see any benefit?
If you die before or shortly after retirement, you shouldn’t despair that you’ve paid into pension schemes for nothing. Your spouse or partner may also be able to receive money from your State Pension, while other dependents may be eligible for payments from your personal or workplace pensions.
State Pensions and private pensions work differently, so let’s take a look at what happens to each should you pass away:
Your spouse’s eligibility to receive money from your State Pension after your death depends on when you reached State Pension age.
If you both reached State Pension age before 6 April 2016 (for men that means being born before 6 April 1951 and for women being born before 6 April 1953), your surviving spouse may be able to increase their basic State Pension based on your National Insurance contribution record. However, this is only the case if your surviving spouse hasn’t earned their own full basic state pension based on their National Insurance contributions.
In 2022-23, that means widowers or widows can increase their state pension to £141.85 per week if it isn’t already at that level.
If you reached State Pension age before 6 April 2016 and delayed or stopped taking your state pension for a while, known as deferring, your surviving spouse may also be able to inherit part or all of that extra State Pension or lump sum.
If you reached state pension age before 6 April 2016 and you’re not married or in a civil partnership, your estate may be able to claim up to three months of your state pension. However, this is only the case if you have not claimed your state pension.
If you and your spouse reached State Pension age on or after 6 April 2016, you receive the ‘new’ State Pension. Under the rules for the new State Pension, if you were married before 6 April, your surviving spouse may be able to inherit up to half of your Additional State Pension or protected payments.
The rules surrounding State Pensions are complex. You can find out what you and your spouse may be entitled to on the government’s website.
Many people in the UK also hold private pensions, either through a workplace pension scheme with contributions by their employer, or set up on their own.
There are two main types of private pensions: defined contribution pensions and defined benefit pensions. While you can name beneficiaries for both, the amount those beneficiaries can claim and when varies.
Defined contribution pensions are the most common type of private pension. Their payouts depend on how much money you’ve contributed to the pension and how your investments have performed. What happens to that pension after your death depends on your age when you die, whether you’ve already begun drawing your pension and how you chose to access that money.
If you die before your 75th birthday and haven’t yet begun drawing on your defined contribution pension, it can be passed to your beneficiaries without being subject to taxation. Your beneficiaries can withdraw all the money as a lump sum, set up a guaranteed income (an annuity), or set up a flexible retirement income (a pension drawdown).
If you die before your 75th birthday and have already started drawing your pension, the way you have chosen to access those savings will determine the options available to your beneficiaries and whether they have to pay tax on the money they receive. If you’ve already withdrawn a lump sum from your pension and have cash remaining from that, it will be given to your heirs as named in your will. However, it will be considered part of your estate and can therefore be subject to inheritance tax.
If you’ve opted for a drawdown, your beneficiaries can access the money that remains in your pension, either through drawdown payments, a lump sum, or by buying an annuity. This can all be done without taxation.
If you set up an annuity with your pension and have already begun receiving an income from it, it typically cannot be passed on to beneficiaries after your death. However, some types of annuities are eligible for pension transfer after death. This will allow your beneficiaries to receive future benefits tax-free. However, some conditions may apply. Contact your annuity provider for more information.
If you die after your 75th birthday, your beneficiaries will also be able to access your defined contribution pension but will need to pay income tax on it.
Defined benefit pensions work differently. Their value is connected to your salary and how many years you worked for your employer. What happens to your defined benefit pension after your death depends on whether you were retired at the time of your death.
If you die before retirement, the pension will pay out a lump sum worth two to four times your annual salary to your beneficiaries. If you were younger than 75, this payment will be tax-free. Defined benefit pensions may also pay a survivor’s pension to your spouse or dependent child, which will be taxed at their marginal rate of income tax.
If you were retired at the time of your death, your defined benefit pension will typically continue to pay a reduced pension to your spouse or another dependent.
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