Saving for the future is one of the most important things we can do to safeguard ourselves and our loved ones. But if the worst should happen before you get to spend or use the savings, what happens to the money?
The outcome might vary depending on the way you’ve saved your money and if you’ve set up a legal framework for your wishes after death, in the form of a will. Savings and investments are usually considered part of your estate, so if you make a will, you can stipulate who will receive your assets. Pensions, however, can be more complicated, with a Pension Death Benefit signifying who will get your pension money and how.
In this article, we set out the main things to think about when it comes to Pension Death Benefits, so you can make sure your loved ones are supported when you’re not around.
Pension Death Benefit: what is it?
A Pension Death Benefit is the way your pension money goes to your beneficiaries when you die. The rules on who can get your Pension Death Benefits may vary, depending on whether you have a defined benefit or defined contribution pension, or have already purchased an annuity (a regular income from your pension). Unfortunately, you can’t inherit a spouse’s State Pension, except in very specific circumstances (see here).
Who is the beneficiary of my pension?
A beneficiary is the person who can access your money if you die.
If you have a Defined Benefit pension (DB scheme, sometimes known as final salary), the rules of the scheme will dictate to whom the Death Benefit can be given. Usually, this will be a dependant: either a spouse (married or civil partnership) or child. You should check your scheme rules carefully before making any plans.
For a Defined Contribution pension (DC scheme), the beneficiary will usually be chosen by the pension administrator/trustees, and would most likely be your next of kin or dependants.
However, it is helpful for the DC pension provider if you fill in an expression of wish form to nominate your chosen beneficiaries. These could be family members, a partner, friends or even a charity. You can update this over time, e.g. if your relationship status changes. The expression of wish is often at the trustees’ discretion, so technically they could decline your wish if it’s clearly not appropriate. However, in practice, this is unlikely to happen.
What can beneficiaries do with my pension?
Your beneficiaries can take a lump sum, set up a regular income from the money and potentially set up a flexible retirement plan, depending on the provider.
If you are setting up an annuity, you can choose the death benefits when you create the policy. For example, you can arrange for a beneficiary to be paid regularly over a set period of time, or you can arrange for the money to be paid to your estate, where it will be handled as part of your will. If you choose a joint life option for your annuity, your beneficiaries can get a portion of the income. A single life option means the annuity payments will cease, unless you died within your guarantee period.
Will my beneficiaries pay tax on the money from my pension?
Your beneficiaries won’t pay tax if you die before the age of 75 and they access the money within two years of your death. The exception would be if you had saved more than your lifetime allowance; in this case, there would be a charge on the amount above the allowance.
If you die over 75, your beneficiaries would need to pay Income Tax on the money they get from your pension.
If you don’t nominate a particular beneficiary and the pension provider decides for you, the chosen beneficiary won’t need to pay Inheritance Tax as the pension won’t be considered part of your estate. If you nominate someone through expression of wish, the death benefits from your pension would count as part of your estate and therefore may be subject to Inheritance Tax. However, if the expression of wish remains at the discretion of the trustees (as is usual), it won’t be considered part of the estate and Inheritance Tax won’t be applied. So check the scheme rules when you undertake this action.
- Check out what your pension scheme rules are before you make any plans
- Submit an expression of wish for any DC schemes if you have particular beneficiaries in mind
- Make a will so any money you’ve saved outside your pension can also go to your beneficiaries – see Free Wills Month for more info about helping charities at the same time!