If you’ve paid into a pension for a number of years, the chances are it may be the biggest savings pot you have, so it’s important to understand what will happen to it when you’re no longer around.
As with so many pension questions, unfortunately there’s no simple answer to ‘What happens to my pension when I die?’ as it depends on the type of pension you have, whether you’ve already started taking money out of it, and the age at which you die.
Here’s what you need to know.
What happens to my pension when I die?
There are two main types of workplace pension, defined contribution and defined benefit pensions. With a defined contribution pension, the amount you end up with at retirement depends on the contributions you and your employer have made, and how the investments in your pension have performed.
If you have a defined benefit pension, also known as a final salary pension, this provides a guaranteed income at retirement which is usually based on how many years you’ve belonged to the scheme and a proportion of your final year’s pay.
Inheriting a defined contribution pension
If you have a defined contribution pension and you die before you reach the age of 75, you can usually pass your pension tax-free to a nominated beneficiary. If you have not started taking money from your pension this can be taken as a lump sum payment.
If you were taking an income from your pension using flexible drawdown or flexi-access drawdown at the time, your dependants can still receive a tax-free income from the remainder of your pension.
However, if you die when you’re over the age of 75, your pension pot will still transfer tax-free, but your dependants will have to pay income tax at their marginal rate of income tax, on any income they receive from it, in the same way as you would have.
If you have purchased an annuity or income for life – it is likely that this retirement income will stop when you die, although you can buy some specific annuities that continue to provide an income for a dependant.
Inheriting a defined benefit pension
If you die while you are paying into a defined benefit pension, your scheme will usually pay out a lump sum to your beneficiaries, which may be, for example, two or three times your salary. The scheme may also provide contributions made into the scheme as a lump sum.
Final salary pensions must by law offer benefits to a surviving widow or widower if you die after reaching the scheme’s pension age. The amount they’ll get will vary depending on the company you worked for, but is typically around 50% of what you would have received. It’s important to note that these benefits can get impacted, or forfeit entirely, if your spouse chooses to remarry after your death.
Many final salary schemes go beyond the minimum and in some cases may even offer payouts to financially dependent children, too. This isn’t the norm however, and usually your defined benefit pension income will stop when your spouse dies, which means you may not be able to pass it on to children or grandchildren.
Some people therefore consider transferring their retirement savings to a defined contribution scheme, so they can pass their pension savings to their children (or whoever they’ve nominated as beneficiaries) tax-free if they die before 75. This is rarely a good decision however, as when you transfer your pension into a defined contribution plan, you give up a guaranteed income stream and take on all of the risks associated with funding your retirement – instead of leaving it for the company you worked for to worry about. Find out more about the risks of transferring a defined benefit pension in our article Should I transfer my final salary pension?
Notifying your provider of who you want to inherit your pension
Like writing a will, it’s important to ensure that you have notified your pension provider of the person, or people (your nominated beneficiaries), you want to inherit your pension in the event of your death. If you didn’t nominate anyone, the trustees of your pension can award it to anyone who’s financially dependent on you, for example, your children or spouse – but this may not be straightforward and can lead to arguments if they are not named as a beneficiary with your pension provider.
To avoid any unwanted stress and financial hardship for your loved ones after you die, it’s important to check with your pension provider and see if you have set up a nominated beneficiary for your pension. If you haven’t, ask if you can do this, as it can help give you peace of mind that your money will go where you want it to if anything were to happen to you.
Similar to updating your will, it’s a good idea to check your nominated beneficiaries every 5 years or so. This is especially important if you have gone through any significant life events such as a marriage or divorce, or have had children or grandchildren since you last updated it. In each instance, you must always notify your pension provider if you want to change or add a nominated beneficiary.
Where to go for pension advice
If you’re 50 or over and have a defined contribution pension, you can get free guidance available on the options available to you from the Government’s Pension Wise service.
If you want personal recommendations or advice about your specific circumstances, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
If you think you might be interested in speaking with a financial advisor, VouchedFor is currently offering Rest Less members a free pension check with a local well-rated financial advisor. There’s no obligation, but once you’ve had your check, the advisor will discuss the potential for an ongoing paid relationship if you think it might be useful to you.
What happens to my state pension when I die?
What happens to your state pension when you die depends on when you reach state pension age.
If you reached state pension age BEFORE 6 April 2016
If your widow, widower or surviving civil partner hasn’t yet built up a basic state pension from their own National Insurance contributions record, they may be eligible for some state pension based on your contributions when you die. For example, if you have a fuller National Insurance record than they do, this could help them obtain a bigger state pension than they may have otherwise been entitled to, as they can apply to use your National Insurance record instead of their own.
They may also be entitled to any extra state pension you delayed claiming when you reached state pension age.
However, if you die and your spouse remarries before they reach state pension age, they will forfeit the right to use your National Insurance record.
Your spouse or civil partner may also be able to inherit any additional state pension when you die, which could be the state second pension (S2P) formerly the state earnings-related pension scheme (SERPS) or the graduated state pension. You can find out how much they might be able to inherit here.
If you reach state pension age AFTER 6 April 2016
The new state pension is based around the principle that individuals should build up pensions in their own right, and not that they are derived from a spouse or partner.
However, if you and your spouse or civil partner both reached state pension age after 6 April 2016, when you die, they will still be able to inherit half of any ‘protected payment’ that exists. Your ‘protected payment’ is the difference between your starting amount and the full new state pension if you start with more than the full new state pension. It is paid in addition to their weekly state pension.
If you reached state pension age before 6 April 2016 under the old system before your death, your spouse will still be able to inherit state pension from you, even if they have reached pension age after 6 April 2016 under the new system. Learn more about how the state pension system works in our article How the State Pension works.