If you’ve been paying into a defined contribution pension over the years, your loved ones can usually inherit your retirement savings when you die, so you might decide you don’t need life insurance too.

Depending on your age at death, your pension may pass to them tax-free, and it won’t form part of your estate for Inheritance Tax purposes either.

When you save into a pension, you are essentially building a nest egg for your financial future, whilst also having peace of mind that your loved ones will benefit in the event of your death. In contrast, when you pay life insurance premiums, unless you have whole of life cover, your loved ones may not see any payout at all unless you die within the policy term.

It’s also important to note that the cost of life insurance can jump significantly once you reach the age of 50, often making it a big expense to fork out for every month, especially when many of us are already struggling to cover rising living costs.

Here, we weigh up the pros and cons of relying on your pension rather than life insurance to provide for your dependants when you’re no longer around.

Will my loved ones get my pension when I die?

If you have a defined contribution pension, which may be a workplace pension or a private pension, and you die before you reach retirement age, your pension will usually pass tax-free to the person you nominated when you first started paying into it.

You can nominate whoever you want to receive your pension when you die, so it doesn’t have to be a spouse or child. You’ll need to make sure you complete an Expression of Wishes/ Nomination form though, stating who you want it to go to. Make sure you update this if your circumstances change, for example, if you get divorced.

If you die after you’ve retired, but before the age of 75, and you were taking an income from your pension using drawdown at the time, your dependants can receive a tax-free income from your pension.

However, if you die when you’re over the age of 75, your pension pot will still transfer tax-free, although tax may be payable on the income your dependants receive from it. No inheritance tax is payable on pension pots.

Get a free no-obligation pension consultation

Pension advice can help you get the most out of your retirement income, helping you on your way to a secure financial future. If you have more than £75k in pension savings, take the first step by arranging a free, no-obligation initial consultation with an expert from Aviva Financial Advice. Any recommendations advisers make will be for products from Aviva and other carefully selected partners. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved. Capital at risk.

Book my free call

How much tax is payable on life insurance payouts?

There’s usually no income or capital gains tax to pay on life insurance payouts.

However, if you have life insurance and the value of your estate exceeds the threshold at which inheritance tax (IHT) becomes payable (£325,000 in the 2022/23 tax year or £650,000 if you’re married) your loved ones could face an IHT bill on any payout. You can find out more about how inheritance tax works in our guide Understanding Inheritance Tax.

One way to ensure this doesn’t happen is if you write your life insurance policy ‘in trust’. By doing this the money that’s paid out by the life insurance policy can be accessed without probate having been granted and it isn’t liable for inheritance tax as it falls outside your estate. This is normally free to do and typically just involves filling in a form, which you can get from your provider. Learn about other ways you might be able to reduce any potential inheritance tax liability in our article Six ways to reduce inheritance tax bills.

Compare life insurance quotes

Get peace of mind for you and your loved ones. Life insurance pays out a cash lump sum in the event of your death. Compare quotes from multiple providers and get free expert advice.

Get a quote

It’s really important to speak to an advisor or pensions expert if you need help working out whether your pension might be able to provide your dependants with a sufficient financial buffer.

If you think this would be helpful you can find a local financial advisor on VouchedFor or Unbiased or check out our guide on How to find the right financial adviser for you.

If you’re considering getting professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.

What if I’ve used my pension to buy an annuity?

If you’ve used your pension to buy an annuity or income for life, your retirement income usually stops when you die, and cannot be passed on to your dependants. This means you won’t be able to rely on your retirement savings as an alternative to life insurance.

However, there are some types of annuities which may continue to provide an income when you die. For example, a joint life annuity will ensure that your spouse, partner, or other named beneficiary will continue to receive an income after you’ve died.

You could also opt to purchase what’s known as ‘Value Protection’ when you buy your annuity, which will ensure that your chosen beneficiary will receive up to 100% of your remaining pot as a lump sum should you die. Some providers will include Value Protection for 90 days after the start period, but you’ll have to specifically buy it as a feature if you want the protection to extend beyond that.

Alternatively, if your annuity is for a fixed term, then payments will continue to be made to your estate until the term is up, even if you die before this, which means your beneficiaries would still be able to access your payments. Find out more about annuities in our article Annuities explained.

Can I pass my final salary pension on when I die?

If you have a defined benefit pension, you can’t pass on your pension to your loved ones when you die.

However, depending on your particular scheme, it may pay out a tax-free lump sum when you die that’s typically two or three times your salary. 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.

Each scheme is different so you’ll need to check the details of your current pension to find out how much your loved ones are likely to get when you die. Find out more in our article What happens to my pension when I die?

Some people might be tempted to transfer their retirement savings from a defined benefit plan 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.

However, 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?

Why have life insurance if I can leave my pension?

The problem with relying on your pension to provide your dependants with financial security when you die is that your pension needs to be big enough to cover your outgoings, such as your mortgage for example, or your children’s education costs.

Many people won’t have saved anywhere near enough to clear all their debts and provide their loved ones with financial security, so may need to look at ways they might be able to boost their retirement savings. One option may be to think about taking out life cover to supplement your pension, so that this will cover any potential shortfall.

There are a number of fee free brokers available in the market, but if you’re looking for somewhere to start, you can get fee-free advice from a Rest Less life insurance expert. All you need to do is book a no-obligation call to get personalised fee-free advice and quotes from the whole market.

However, if you have built up a significant pension pot that would comfortably cover all your outgoings in the event of your death, then you might decide having life insurance as we;; is unnecessary.

Remember too that if you are employed, your employer may offer ‘death in service’ benefit, which means your dependants will get a lump sum when you die, usually equivalent to three or four times your salary. If you’re not sure whether life insurance is right for you, read our guide Do I need life insurance?