Posted in:

What happens to your private pension when you die?

They say there are two things that are certain in life – death and taxes. We begrudgingly pay the taxman his due, but you need to ask the question, what happens to your private pension when you die?

What happens to your private pension when you die?: Summary Table

ℹ️️ Two most common types of private pension?•Defined contribution pensions
•Defined benefit pensions
❓ Factors that affect private pension taxation when you die?•Death age of pension holder
•Uncrystallised pension
•Type of pension withdrawal
🛎️ What is the main factor that affects defined benefit pensions when you die?If the pension holder retired prior to death
🔍 The most important State Pension rule when you die?If the pension holder reached State Pension age

OPEN A SIPP ACCOUNT TODAY

Budgeting for your retirement can be taxing, unless you use the right tax wrappers, like ISAs or SIPPs, for example. In this blog, as well as explaining what happens to a private pension when you die, we also explain why you should seek professional advice regarding how much you can leave your loved ones. To find out more, please read on.

Various types of pensions

As you are probably aware, there are several types of pension schemes. They include:

  • The State Pension
  • Defined contribution pensions
  • Final salary pensions
  • Private pensions
  • Workplace pensions

Different conditions apply to each type of pension when it comes to the rules and regulations concerning inheritance tax and pension beneficiaries. In some instances, the age at which you pass away can have an effect. In this blog, we focus on private pensions, and if you’re asking yourself, what happens to my private pension when I die? – all will be explained in due course.

A frequently asked question is If my husband dies, do I get his private pension?

This is a question that concerns many married women or women in partnerships. The answer is not as straightforward as you might hope because who gets your private pension when you die is determined by several factors. Please read on for a fuller explanation.

The two most common types of private pension

There are two common types of private pension, and each behaves differently in terms of what happens if you die before you begin receiving payments from them.

Defined contribution pensions

A defined contribution pension scheme is a scheme that relies on how much has been paid into it. In other words, it relates to a defined amount. If you haven’t withdrawn any income from the scheme, what happens to the private pension pot when you die before reaching the age of 75, is that it can be passed on to your beneficiaries, tax-free.

The money can be taken as a lump sum, invested in drawdown or used to buy an annuity. The tax could be charged if your beneficiaries don’t make a claim within two years of your passing.

If, on the other hand, you expire before your 75th birthday and you have already started taking income from your scheme, the way you chose to receive the income will impact the action your beneficiaries should take.

If, for example, you took a lump sum, but you had some cash in your bank account separate from your pension, this will be considered to be part of your estate. However, if you took the drawdown option, what happens to a private pension pot when you die is that your beneficiaries can access the remaining money in your pension fund completely tax-free. This remainder can be taken in drawdown payments or as a lump sum or used to purchase an annuity.

Annuity private pension payments after death

With an annuity, the situation is a little more complex. If you have already begun taking income from an annuity prior to your death, the scheme can not be passed on to a beneficiary under normal circumstances. However, certain kinds of annuity can be passed on after death, and these include joint life, value protected, and guaranteed term annuity schemes.

If the annuity in question is one of those mentioned above, your beneficiaries can receive future payments free of tax, however, certain factors could apply. What happens to a private pension when someone dies in this case is that although your beneficiaries can receive future payments free of tax, specific conditions may have to be observed. Your best bet is to seek advice from either your pension provider or a wealth specialist company.

Information about SIPPs

SIPPs are Self-Invested Personal Pension schemes that allow you to choose how to invest your savings. They are a form of defined contribution personal pensions. The value of your pension pot when you reach retirement age is dependent on the contributions made into the pension, as well as the performance of the investments.

The rules for disbursement of pension funds essentially follow those described above in relation to defined contribution plans.

Regarding inheritance tax, the proceeds from SIP pensions don’t form part of your estate when it comes to inheritance tax, provided they remain uncrystallised at the time of your passing. If you took out the 25% tax-free lump sum and transferred it into your bank account, it would form part of your estate from an inheritance tax viewpoint.

In April 2015, new SIPP inheritance tax rules came into force. They reduced the tax liability regarding any lump sums paid to beneficiaries when the policyholder died after 75, from 45% to the recipient’s marginal income tax rate.

Defined benefit pensions

What happens to a private pension when you die, and your pension is a defined benefits scheme? This scenario is a little different due to the fact that this type of pension is linked to your salary and for how long you worked for your employer. The main consideration with these types of pensions is whether or not you retired before you passed.

We make money simple for over 80,000 investors

Find your ideal ISA today

Start now

If you pass away before you retire, the private pension payments after death will be based on between two to four times your salary. If your death occurs before you reach 75, any payments to beneficiaries will be made tax-free.

This type of pension also pays what is termed as a “survivor’s pension” to the spouse, partner, or dependent child. However, these payments will be taxed at the dependent’s marginal rate of income tax.

Should you die before you reach retirement, defined benefit pensions will continue to pay a reduced pension to spouses, civil servants, or any other dependents. The rules that apply to the scheme in question will define who can be regarded as a dependent.

However, when compared to personal pensions, these rules are considerably stricter when it comes to determining who can receive death benefits.

Unfortunately, not everybody can afford a private pension. Thousands of people still rely on the State Pension, and they too are concerned about what happens to their pensions after their death. So we will round off this blog with a brief explanation.

What Happens to Your State Pension After Your Die?

You now know who gets your private pension when you die, but what about your State Pension? The good news is that you can pass your State Pension payments on after your death. However, they can only go to your spouse or civil partner.

The most important rule regarding the State Pension and the death of the pension holder is whether or not he or she was of pensionable age before the last changes came into effect on the 6th of  April 2016.

If you were of pensionable age before the 6th of April 2016 and you were receiving the basic state pension, then your spouse or civil partner will be able to claim your additional State Pension. The decision and the amount of additional state pension your wife or partner could receive will be dependent on your National Insurance contribution details.

In certain cases, a lump sum could be passed on upon death, with your spouse or partner qualifying for bereavement benefits.

Should you have reached state pension age after the 6th of April 2016, your spouse or partner could be entitled to inherit an extra payment in addition to your pension.

There is another scenario you can take into consideration. If your husband, wife or civil partner reached pensionable age before the 1st of April 2015, and your National Insurance record is better than theirs, after your demise, your partner can request his or her payment to be calculated on your record and not theirs.

Your wife or civil partner may also be able to inherit a part of your additional state pension – if you paid into one, that is.

Seek financial advice

We hope that this blog has answered your question of what happens to my private pension if I die in a way you understand. The good news is that in most instances, your pension pot can be passed on to your dependents and, in some cases, tax-free.

However, it is quite a complex subject, so if you are left in any doubt, we recommend you talk to your pension provider or an independent wealth specialist advisor.

FAQ

Who receives your pension when you die?

The pension beneficiaries are determined by the terms of the pension contract and the specifics of that contract. Pension beneficiaries can be spouses, civil partners, children, or grandchildren.

What taxes do you pay on UK private pension you inherit?

The taxes you pay on inheritance will depend on the type of pension scheme, payment plan, and the age of the deceased pension owner. For example, up to 45% income tax is charged on defined contribution pensions with lump sums or annuity payments and if the pension owner dies at age 75 or over. Also, if the deceased’s pension is above the current lifetime allowance, you will pay a lifetime allowance tax charge. Visit gov.uk for more information.

How does inheritance tax on pension work?

Inheritance tax is imposed on a deceased’s estates (property, money and possessions), but it usually does not apply to inherited pension pots. This is because pensions are usually ‘discretionary‘, so pensions are not considered part of a deceased estate. However, inheritance tax is charged if pension payments are not discretionary. As standard practice, a 40% inheritance tax applies to part of an inherited estate over £325,000 that is not left to a spouse, civil partner, or charity.

Match with a portfolio and start investing today

Simple, efficient and low cost, Moneyfarm helps you protect and grow your money over time.

Sign up with Moneyfarm today to match with an investment portfolio that’s built and managed to help you achieve your financial goals.

Make your money work harder for you, without breaking a sweat.

Get started

As with all investing, your capital is at risk. The value of your portfolio with Moneyfarm can go down as well as up and you may get back less than you invest.