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What happens to your pension when you die

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    If you have a defined contribution pension, your pension can be passed on to any named beneficiary free of inheritance tax when you die. Ultimately what happens to your pension when you die is up to you: you could pass it onto a spouse, a child, a sibling… You could even pass it onto your best friend if you wanted to.

    This matters, because you don’t want your hard-earned money to disappear into the ether. You want to know that you can share it with a loved one, even when you’re gone; that it will become a part of your legacy.

    If you have a Defined Benefit (Final Salary) Pension, the rules are different and slightly more complex. In this article, we’re focusing purely on defined contribution pensions, but if you do want to know what happens to your Defined Benefit pension when you die you can read more about them here.

    Does your pension die with you?

    The great thing about personal pensions is that they survive you and can be passed on to loved ones when you die.

    This loved one can be anyone: you have free rein over who you want to be your beneficiary. This could be a spouse, or perhaps you want to leave your pension to a child to support their financial future. Some people list a charity as their beneficiary, while others may pass their pension onto a friend or family member in particular financial need. There are no limits – you don’t have to be married and you don’t have to choose your beneficiary from a limited pool.

    Another brilliant reason to have a personal pension is that it sits outside of your estate. This means that it is free from inheritance tax. Inheritance tax is huge and can leave a hefty dent in your savings: your money will drop by 40% on assets that exceed the ‘nil rate band’ threshold, which is currently at £325,000, unless it still sits in the tax efficient wrapper of a pension pot. So, not only is your pension the most tax efficient way to save money, it’s also the most tax efficient means of having money.

    Your pension should therefore form a core part of your estate and legacy planning – anything you still own in your personal pension when you die will go straight to your chosen beneficiary. Plus, the process is quick: your money won’t go into probate, meaning they will receive it far sooner. This is particularly important for a spouse who may have financial difficulties following your death.

    Generally, your State Pension dies with you and cannot be passed on when you die. There may be some exceptions for older married couples where the surviving spouse may inherit part of the deceased’s pension, but these cases are few and far between these days.

    What happens to my private pension if i die before 65

    Pension rule changes mean that you can now leave your private pension to anyone you choose free of inheritance tax when you die. This includes if you die before your state pension age.

    The state pension age used to be 65, and this was also the ‘default retirement age’; this meant that you were forced to retire at 65. However, due to the new pension freedoms, this no longer exists and it is possible to keep working after you reach your state pension age. The current state pension age for men and women is 66. The age threshold is scheduled to rise to 67 between 2026 and 2028, and is expected to increase to 68 from 2037. 

    Regardless of when you are due your state pension (which you can check here), your pension sits outside of your state and will therefore remain free from Inheritance Tax – so this can be a simple and completely legitimate way to avoid inheritance tax. Saying that, there are cases when your beneficiary cannot avoid paying tax on your pension entirely. Depending on how old you are when you die, your beneficiaries may need to pay income tax on any pension amount left to them. As a general rule, if you hand over your pension pot before you turn 75, your beneficiaries won’t be liable to pay any income tax. But, if you are over 75 when you die, they will. 

    Similarly, if you have taken cash out of your pension pot and a chunk remains, it will be subject to inheritance tax (depending on the size of your estate). This is because the moment your pension leaves your pension pot, it is considered part of your estate.

    Inheritance

    While you are planning out your pension, your estate and your legacy, be sure to review and update your pension beneficiary details. Even if you have stated in your will that you want a certain person to receive your pension, if they aren’t listed as a beneficiary then your will can be overruled.

    What happens to my pension if I die before I retire?

    If you die before you retire, your pension can still be passed on to any named beneficiary. If you are under 75 at the time of death, the money can be passed on free of inheritance tax and income tax. If you’re over 75 your beneficiary will need to pay income tax on the money.

    This is one of the (many) great things about having a personal pension: your pension survives you. And when you have spent a lifetime working hard and saving meticulously, this matters. You also have complete control over who you want to receive your pension; this doesn’t have to be a spouse or a child. You can choose to leave your pension to an aunt, an uncle, a charity… You could even leave it to your neighbour if you wanted to.

    It’s important to note that if you haven’t accessed your pension it will be tested against your lifetime allowance. The Lifetime Allowance (LTA) is a limit on the value of payouts from your pension schemes that can be made without triggering an extra tax charge.

    If this allowance is exceeded, a tax charge must be paid on the amount above the allowance. For the tax year 2021-22, the lifetime allowance is £1,073,100. The lifetime allowance will remain at this level until 5 April 2026.

    In addition, when exploring your estate and legacy planning, be sure to note that your State Pension will NOT be included in the amount that you pass on to a beneficiary. As a general rule, your State Pension dies with you. There are occasionally exceptions for older married couples where the surviving spouse may inherit part of the deceased’s pension, but these cases are rare.

    But don’t worry; it isn’t all doom and gloom. Any pension that a beneficiary inherits won’t count towards their own lifetime allowance. We recommend that you have a chat with a financial advisor if you’re not quite sure about how these figures could one day affect you (and your loved ones). 

    What happens to my SIPP when i die

    A self-invested personal pension is treated in the same way as a defined contribution pension and can be passed on free of inheritance tax to any named beneficiary.

    The rules are the exact same: you can choose whoever you want as your beneficiary; it doesn’t have to be a spouse or child. In fact, it doesn’t even have to be one individual – you could pass your SIPP onto a charity.

    It’s vital that you update your SIPP provider with all the details of your chosen beneficiary. This is especially relevant if you have remarried as you may have your previous partner listed as a beneficiary on one of your SIPPs. Your beneficiaries will override anything detailed in a will, so make sure all the information is as it should be.

    What happens to my NHS pension when I die?

    Your NHS pension is a Defined Benefit pension and is therefore subject to different rules when you die. It’s likely that there will be a provision for your spouse or dependent child/children, but it’s usually paid out as a monthly income rather than as a lump sum.

    Since NHS pensions are defined benefit, it’s unlikely that you will be able to leave it to a non-dependent or adult child or someone other than your spouse.

    You can find out more about what will happen to your NHS pension – and final salary pensions in general – when you die here.

    Please note: 2020 Financial are a Pension Transfer specialist but we do not offer advice on NHS pensions.

    If you’re worried about how your partner, children or other ‘financial’ dependents might provide for themselves when you die it is worth speaking to your NHS pension scheme administrator to see what provision there might be for them and consider life insurance to plug any gaps.

    If my husband dies do I get his pension?

    Pensions can be left to anyone that you name as a beneficiary. The named beneficiary will supersede any spousal right to automatically inherit. It is therefore not guaranteed that you will receive your husband’s pension if he dies.

    This is why it is so important to explore your estate planning in the case of a spouse’s death. You cannot assume that you will receive their pension, and you need to be confident in the knowledge that you will survive financially once they are gone.

    We always encourage people to check in with all of their pension providers to find out whether beneficiary details are up to date. Particularly when you have lots of pension pots floating around, there’s a chance that one could still have old information on it; especially if you or your spouse were previously divorced. You might find it very difficult to overturn the beneficiary in the event that they haven’t been updated.

    Pension inheritance tax rules

    Pensions are an extremely tax-efficient way to pass on wealth to loved ones since they sit outside the estate and are not usually subject to inheritance tax.

    Inheritance Tax is payable at 40% on assets that exceed the ‘nil-rate band’ threshold, which is currently at £325,000. Without a pension’s tax-efficient container, you could see your well-earned savings dropping by almost a half. This is why we strongly recommend that you keep your pension safely tucked inside a pension fund.

    However, prior planning is important. Investing money into your pension is something that should be done as part of a sustainable plan, rather than a quick fix to save tax on a chunk of money. HMRC are savvy to this kind of behaviour, and if they think that you have only moved money to avoid inheritance tax, they will swiftly claw it back. Instead, prepare yourself to pass on wealth as part of your long-term plans.

    RELATED: GUIDE TO THE NEW INHERITANCE TAX RULES

    Need help with your legacy and pension planning?

    If you’d like to speak to an Independent Financial Advisor or Pension Transfer Specialist please get in touch to book a consultation. We’re here to help you discover what financial freedom means to you. We’ll work with you – as part of a trusted partnership – to map out how we can get you from where you are to where you want to be.

    Whether it’s pension or retirement advice, investment planning or wealth management, we’re here to help.

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    Simon Garber

    Simon Garber

    Simon Garber, DIP PFS, runs 2020 Financial Ltd. He's an Independent Financial Adviser and Pension Transfer Specialist with over 20 years of experience. He's FCA registered, a member of the Personal Finance Society and holds the coveted Gold Standard for Defined Benefit Pension Transfer Advice.

    He is the Managing Director of 2020 Financial Ltd, Financial Advisors specialising in Retirement Planning & Wealth Management, based in Southampton, Hampshire.

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