Understanding what happens to your pension when you die is an important part of retirement planning. Your pension arrangements can significantly impact your loved ones, so it’s crucial to know the rules around inheritance, tax implications, and beneficiary nominations. This guide explains what happens to different types of pensions in the UK, including the State Pension, workplace pensions, and private pensions.
1. State Pension: What Your Spouse or Partner Can Claim
How the State Pension Works After Death
The State Pension does not automatically pass on to your beneficiaries. However, your spouse or civil partner may be able to inherit part of your pension or receive additional payments, depending on your circumstances.
What Your Partner Might Be Entitled To
- If you reached State Pension age before 6 April 2016, your partner might be able to claim a portion of your pension under the basic State Pension rules.
- Under the new State Pension system, your partner may inherit part of your Additional State Pension or receive a lump-sum payment.
For detailed eligibility, visit the UK Government website or read our guide on Understanding the UK State Pension.
2. Defined Contribution Pensions: Flexible Inheritance Options
What Happens to Defined Contribution Pensions?
With a Defined Contribution pension, your pension pot is usually passed on to your beneficiaries. The way this happens depends on whether you started drawing your pension before you died.
- If you die before age 75, your beneficiaries can receive your pension tax-free, either as a lump sum or regular payments.
- If you die after age 75, any pension income taken by your beneficiaries will be taxed at their income tax rate.
Nominate Your Beneficiaries
To ensure your pension savings go to the right people, complete a nomination of beneficiaries form with your pension provider. This form is not legally binding but helps guide your pension trustees when distributing your pension pot.
Learn more about your pension options in our article What to Do with Your Pension Pot When You Retire.
3. Defined Benefit Pensions: What Your Dependents May Receive
What Is a Defined Benefit Pension?
A Defined Benefit pension (also known as a final salary pension) provides a guaranteed income for life. When you die, this income may continue to be paid to your spouse, civil partner, or dependents, but often at a reduced rate.
Typical Benefits for Dependents
- Survivor’s Pension: Usually pays between 50% and 75% of your original pension income.
- Lump Sum Death Benefit: If you die before retirement age, your dependents may receive a lump sum—typically 2-4 times your salary.
Check with your pension provider to understand what your scheme offers and update your nominated beneficiaries as needed.
4. Private Pensions: Inheritance Rules and Tax Considerations
What Happens to Private Pensions?
If you have a Self-Invested Personal Pension (SIPP) or other private pension, your pension pot can usually be passed on to your beneficiaries. Similar to defined contribution pensions, how much they receive and the tax implications depend on whether you died before or after age 75.
- Before age 75: Benefits are usually tax-free.
- After age 75: Income is taxed at the recipient’s income tax rate.
Ensure your beneficiary nomination forms are up to date to avoid potential inheritance tax issues.
5. Considerations for Inheritance Tax
When Is Inheritance Tax Payable?
Most pensions are not subject to inheritance tax, but there are exceptions, particularly if your pension payments go into your estate or if you haven’t nominated beneficiaries. It is advisable to consult a financial advisor to avoid unnecessary tax liabilities.
For more on planning your estate and pension inheritance, you might also find our article on Legal and Administrative Steps to Take Before Retirement helpful.
Conclusion: Make Sure Your Pension Goes Where You Want It To
Planning for what happens to your pension when you die is an important step in ensuring your loved ones are financially secure. By understanding the rules for different types of pensions, keeping your beneficiary nominations up to date, and considering the tax implications, you can make sure your pension savings go to the right people.
If you’re unsure of your pension rules, speak to your pension provider or get financial advice to help make the best decisions for your family’s future.
