What happens to your pension when you die?

One of the very first things you should do is check whether or not you have an Expression of Wish form logged with your pension provider. An Expression of Wish form tells your pension provider who your beneficiaries are, in other words who you want your pension to benefit when you die.

If you don’t already have one, it’s really important to put it in place. Talk to your pension provider or scheme administrator about this and they will be able to advise you. Once you have one in place, it’s essential to keep it up to date to ensure that your pension goes to the right person or people and that their contact details are up to date.

If you were to die before you retire, usually the entire value of your company or personal pension fund can be paid to your beneficiaries free of tax. This is because most pension plans are automatically written ‘in trust’. This means that your pension fund is kept separate from your estate for Inheritance Tax purposes.

Defined contribution pensions

Defined contribution (DC) pensions are a type of company pension and are sometimes known as money purchase schemes.

If you die before you start taking this type of pension, the accumulated value of your DC pension pot could be passed on to your beneficiaries as a lump sum. If you are under the age of 75 when you die, this sum is normally tax-free. Your scheme administrator or HR department will be able to tell you how much your beneficiaries would receive.

If you die in retirement with a defined contribution pension, what happens to it will depend on whether you’ve started drawing pension benefits and how old you are when you die –  there may be tax liabilities to consider. Your pension provider or a financial advisor will be able to advise you here. It really is worth having a conversation with an expert as the rules can be complicated and you don’t want to leave a nasty surprise for your loved ones.

Defined benefit pensions

Defined benefit pensions are another type of company pension and are probably better known as final salary pension schemes. These pensions give you a set amount when you retire, depending on your salary and your length of service in the company.

If you have one of these pensions, again, it really is worth taking the time to talk to your scheme provider or HR department about what would happen if you die before you retire. There are a few different outcomes and it’s better to know in advance what the situation would be.

With defined benefit pensions, whether or not a person was already retired when they passed away is what impacts what loved ones will receive. A defined benefit pension will usually continue paying a reduced pension to a spouse, civil partner, or other dependents if previously requested by you.

If you die before you reach State Pension age, then sadly there are no pension or death benefits available to your inheritors.

An annuity is a regular payment that you can buy with a portion or all of your pension. It used to be that you had to turn 75% of your pension pot into an annuity. Now there is no obligation to do this but many people prefer to do so as it is a guaranteed income that you get every year until you die.

If you do have an annuity, you can make arrangements before you take it out to make sure that any remaining funds go to a nominated beneficiary in case of your death. It’s important to bear in mind however that if you have an annuity that can be passed on to someone else, you will get a slightly lower amount while you are alive.

Types of Annuity:

• Guaranteed term annuity.This allows you to buy an annuity for a guaranteed amount of time, generally between one and ten years, although some annuity providers may increase it up to thirty years. With this policy, if you die before the end of the guaranteed term, the people you nominate will get the money that’s left.
• Annuity protection.This is an insurance policy that makes sure that your remaining funds go to the people you want to receive them after your death.
• Joint life with last survivor annuity.This is where you nominate a beneficiary to receive your annuity after you pass away. In this case, the payments will continue as long as either person is alive, although the second person tends to get a smaller pay-out.

Company pensions

An executor will need to get in touch with the deceased’s pension provider or scheme administrator for every pension they have to inform them of the death and to find out what happens next. It’s important to do this as soon as possible.

There will probably be forms to fill out and they will want to see a copy of the death certificate. If the deceased was still in employment when they died, their employer may have contacted the scheme already, but it’s always best to check and make sure.

State PensionS