What happens to my pension when I die?
The benefits that are paid from your pension when you die will depend on the type of pension scheme you have.
It is really important that you check this out for each pension scheme you have. Gone are the days of just having one scheme, you may have several from old firms that you have worked for. (Find and consolidate your lost pensions: our 4-minute ‘how to’ video)
There are two main types of company pension scheme, a money purchase scheme and defined benefit pension.
If you have been a member of any company scheme, you could have defined benefit structures and the death benefits within these schemes normally provide a cash lump sum and a dependent’s pension.
If you have had a company money purchase scheme, or any personal pension then the new pension freedoms, brought in from 2015 will apply. One of the main changes was to give everyone more flexibility in how benefits can be passed on. The age at which you die is key to how benefits are paid and treated for tax. This also carries on through any successive beneficiaries.
In simple terms, provided you have not bought an annuity (in which case the death benefits will have been fixed at the point you purchased it), if you die before you reach 75, irrespective of whether you have drawn benefits from your pension and are using a form of flexi-access drawdown or whether you have yet to draw benefits, the value of your pension fund would be payable either in the form of a cash lump sum or as a tax free income to the beneficiaries you choose.
However, if you die after your 75th birthday, then the benefits can still be paid as a cash lump sum or as an income, but whoever receives them will pay income tax at their marginal rate.
In the event that one of your nominated beneficiaries dies while they are receiving the benefits that are payable from the pension fund (following your death), it may be possible for those benefits to continue to be passed on to additional beneficiaries until the fund has been fully liquidated.
These benefits will be subject to income tax and again this will depend upon the age of the person that was receiving them when they died. This gives you the opportunity to pass your pension funds down through the generations of your family with the pension fund remaining invested in a tax privileged environment. Most importantly, you never lose control of the capital as you would if you purchased an annuity.
It is also interesting to note that the beneficiaries you nominate don’t just have to be direct family members, you can leave your pension benefits to anyone you want to. But it is important to understand that the decision you make on who benefits are paid to, is ultimately made by the pension scheme administrator. It is therefore important to ensure your wishes are carried out and to complete an expression of wish form or nomination form which you lodged with them. So keeping your wishes simply, accurately and up to date will minimise any delay in the payment of your pension benefits in the event of your death.
Martin Tilley is director of technical services at Dentons Pension Management, a SIPP specialist