You are here: Home - Retirement - Retirement planning - News -

What happens to your pension when you die?

Written by:
A pension provider is calling for a blanket inheritance tax exemption on pension death benefits after its survey found that only 7% of UK adults can correctly identify how their pension fund will be treated on death.

The AJ Bell survey showed only 4% could identify how it would be taxed. With nine million people contributing to personal pensions each year, that is 8.4 million consumers who don’t understand the rules.

The provider has written to Philip Hammond, Chancellor of the Exchequer, calling for the discretion providers currently have around how pension death benefits are distributed to be removed, with all pension death benefits remaining free of inheritance tax (IHT).

Andy Bell, chief executive at AJ Bell, said: “The way pension death benefits are taxed is one of the most generous outcomes of the pension freedoms but this is lost on the vast majority of people. Most of them also assume the funds will automatically go to their nominated beneficiary, without realising that their pension provider currently has discretion to alter that. In the new era of pension freedoms this control should remain with the pension holder, not the pension provider.”

Who benefits?

Of those surveyed by AJ Bell, half (51%) assumed their pension would automatically go to the person they have nominated as the beneficiary of their pension. 14% think it will form part of their estate and be distributed as per their will, and a quarter (25%) admitted they didn’t know.

When it comes to how their pension will be taxed upon their death, only 4% of people questioned correctly identified that it would be tax-free if they die before age 75 and subject to income tax of the beneficiary if they die post 75. A majority (58%) admitted outright that they didn’t know while some others thought it would be subject to the main forms of taxation such as income tax (10%) or IHT (14%).

Additionally, only one in five British adults with personal pensions (18%) have nominated who they would like to receive their pension on death within the last three years.  A third (32%) have never nominated a beneficiary and another third (35%) nominated their beneficiary over five years ago.

Discretion and Inheritance Tax

AJ Bell said the fact that pension providers have discretion over who receives death benefits means they can provide people with an IHT benefit. However, most people don’t understand the process and therefore don’t know who will receive their pension death benefits or how they will be taxed.  Pension providers are obliged to consider all potential beneficiaries but family circumstances change frequently and people don’t update their nominated beneficiaries regularly.

Bell added: “A relatively straightforward change to the rules could greatly simplify this area of the pension system without being a huge cost to the government. It is clear that the current rules are designed so that pensions are not liable to inheritance tax in the vast majority of cases and so formalising that outcome in all cases is not a difficult step for the government to take. It is an oddity that the provider having discretion over the payments is a condition of this tax treatment and feels out of place in today’s world of pension freedom and choice.” view

Your pension fund is often your greatest single asset outside of your main home. As such, it is good to establish how it would be distributed on your death. Although pension providers have discretion, in most cases it will be distributed in line with your statement of wishes – held with your pension provider, so make sure this is up-to-date.

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Are you a first-time buyer looking for a mortgage?

Look no further, get the help you need by searching for your perfect mortgage

Five ways to get on the property ladder without the Bank of Mum and Dad

A report suggests the Bank of Mum and Dad is running low on funds. Fortunately, there are other options for st...

The essential Your Money guide to the April 2018 tax changes

As we head into the 2018/19 tax year, a number of key changes take place to existing policies while some new i...

A guide to switching energy provider

All you need to know about switching from one energy supplier to another.

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Having a baby and your finances: seven top tips

We’re guessing the Duchess of Cambridge won’t be fretting about maternity pay or whether she’ll still be...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co... Awards 2018

Now in their 21st year, our awards recognise the companies offering the best products and services to consumers

Money Tips of the Week

Read previous post:
weekly wages
Workers see falls in real wages

Full time weekly ‘real’ wages fell 0.4% in real terms in the year to April 2017, according to figures from...