What happens to your pension when you die?
Your pension is an asset, just like your home, and other investments. So, when you die, you’ll want to make sure that your family and loved ones are able to make use of anything that you have left in your pension pot. Usually, it is only defined contribution/money purchase pensions that can be inherited (of which there are many variations), and it will, of course, depend on whether you have any residual funds left over.
Usually in order to pass a pension on it needs to be a flexible access scheme. And so it’s worth mentioning that some older pension schemes don’t offer flexible drawdown, and in these circumstances, you might want to take advice about whether having your money in a more modern scheme is worth considering, though there will be wider pros and cons of making such a switch.
How can pensions be passed down on death?
If you have money left over in a flexi-access drawdown pension and you die before the age of 75 your spouse, partner, dependant or nominated beneficiary can either:
stay in the flexi-access drawdown plan and take income tax-free
take the remaining value as a lump sum tax-free
buy an annuity, where income will be paid tax-free.
If you die after age 75 with your money in flexi-access drawdown your beneficiary can
stay in the flexi-access drawdown plan and take income subject to tax at their marginal rate
take the pension as a lump sum which will be subject to income tax at their marginal rate
buy an annuity, where income will be subject to tax at their marginal rate.
Nominating Beneficiaries
You should always ensure that you have a will that clearly expresses the wishes for your assets on death. And although a will doesn’t directly cover your pensions, it can help to resolve any disputes that may arise. However, it is also advisable to complete a Nomination of Beneficiary form for your pension also sometimes known as an Expression of Wishes form. You can nominate more than one person and determine how much each one will receive with this form. You should also be able to change your mind later, should you wish to.
The crucial thing is to make sure that these arrangements are kept up to date. Usually, you will complete an expression of wish form when you join a pension scheme. If you’ve had several pension schemes over your working life, then the beneficiaries you’ve nominated may be different in each case – for instance, an ex-spouse or partner, rather than your current one. You should therefore make an effort to track down your pensions and update your wishes with each provider.
Tax on pensions on death
Pensions are not subject to inheritance tax when you die. If you die before the age of 75, the person(s) who inherit your pension pot can draw on the money as they wish, without paying any income tax either. However, if you are 75 or over when you die, a beneficiary of your pension pot will have to pay income tax on any withdrawals at their marginal rate (i.e. the highest rate of income tax that they pay).
Pensions can reduce IHT
Due to the fact that pensions do not form part of your estate for IHT. This can often be a key consideration for inheritance tax planning. If inheritance tax planning is a key objective for you and you have other assets you can use to provide an income in retirement. Keeping the pension intact as much as possible, while reducing other assets first, can be very tax efficient. Any monies left in the pension will not form part of your estate and will pass free from IHT to your chosen beneficiaries.
If you are uncertain about anything to do with passing on your pension, or you just want some general advice around pensions or IHT, get in touch.
It is always a good idea to talk to an expert before making any financial decisions.
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