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What happens to your pension when you die?

At a glance…

What happens to your pension when you die depends on what type of scheme you have. If you have a personal pension then, generally, any money left in your pot can be passed on to any person or organisation when you die (also known as your beneficiaries). The rules are usually a little tighter if you have a final salary pension that guarantees you a specific income for the rest of your life.

How do I know what type of pension I have?

It’s very likely that your pension will fall under one of the following two main categories (if you are unsure which relates to you then ask your pension provider):

Personal (defined contribution) pension scheme
The type of scheme could be workplace-based or private and the income you receive depends on how much you have contributed over the years and how well the pension investments have performed.

Final salary (defined benefit) pension scheme
This type of pension is usually a workplace scheme that promises to pay you a guaranteed income in retirement, based on how long you have worked for the company and your salary.

What happens to your pension when you die?

I’ve got a personal pension: what happens to that when I die?

Flexibility is one of the main features of a personal pension. And this flexibility includes choosing what happens to any money left in your pot when you die. You might decide to leave it all to one child. You could share it out among family and friends. Or, you could choose to leave it to charity.

If I leave my personal pension to someone, won’t they get taxed to the hilt?
Generally, pensions are not counted as part of your estate. And if you are under 75 when you die then any pension benefits you pass on will not be taxed. The recipient could choose to:

  • withdraw the lot as a tax-free lump sum
  • Take a tax-free income, regularly or as and when they need it
  • Leave the pension money as it is and access it later
  • Transfer what you have passed on to one of their own pension pots

If you are 75 or over when you die, then any pension benefits you pass on will be taxed at the beneficiary’s marginal rate. For basic rate tax payers this is 20%, rising to 40% and 45% for higher and additional rate tax payers. Accessing these pension benefits could push your beneficiary into a higher tax bracket. So, it makes sense for them to get specialist help on how to be as tax efficient as possible.

How do I go about nominating a beneficiary?

When you set up your personal pension you should have been asked to complete a form listing your beneficiaries.

You can check this by phoning your pension provider or financial adviser. And it’s simple to change your beneficiaries at any time. You will simply need to complete and return a new form (usually called an expression of wish form).

What if I don’t want to pass on my money when I die?

You don’t have to! Having worked hard all their life for their pension, lots of people want to enjoy every penny of their savings. And why not? There is one key thing to consider: managing your pension so it runs out at the point you die is extremely difficult. This is where a financial adviser can help.

I’ve got a final salary pension: what happens to that when I die?

Final salary pensions are generally extremely valuable and if you have one it usually makes sense to keep hold of it. However, they are less flexible than personal pensions when it comes to passing on benefits to a beneficiary.

In many cases you can nominate a beneficiary to carry on receiving a proportion of guaranteed income when you die (there are often restrictions around who the beneficiary can be). The amount of income they get will usually be for a specific period of time only and significantly less than you were receiving.

The rules vary from scheme to scheme so you will need to speak with your HR team or final salary pension provider for a clear idea of what you specifically can and can’t do.

What if I’ve got a final salary pension and want more flexibility?

Leaving a meaningful and lasting inheritance might be a big part of your plans. And if you have a final salary pension then, as long as you haven’t started taking any benefits, you can usually transfer it to a modern personal pension. This will give you complete flexibility when it comes to passing on your pension when you die. There is a massive but, though.

Final salary pensions are extremely valuable because the income you receive is guaranteed. All the risk and commitment sit with your employer or pension provider, rather than with you. Also, the level of guaranteed income is often generous. Combined, these elements offer a peace of mind that you won’t get with a personal pension, especially if your only other main source of retirement income will be the State Pension. So, in most cases it doesn’t make sense to transfer out of a final salary scheme for any reason.

Can I pass on my State Pension?

In most cases, no. That’s the short, sharp reply! It’s easiest to view the State Pension as not your money. It’s a commitment by the government to pay you a specific income on a regular basis and from a set age. But nothing is guaranteed, and the rules have been tweaked a lot over the past few years; a practice that looks set to continue for the foreseeable future. You can find out more about inheriting the new State Pension here.