What Happens to Your Pension Savings When You Die?
Pension savings can be a complex and confusing topic, especially when it comes to what happens to them when you pass away. The outcome depends on various factors, including your age, the type of pension you have, your marital status, and the beneficiaries you have nominated.
State Pension
The rules for state pensions vary depending on whether you receive the old or new state pension. If you reached state pension age before April 6, 2016, you are on the old state pension. In this case, you may be able to inherit some of your spouse or civil partner’s state pension when they die. You could also top up your national insurance record with your partner’s eligible years, increasing your basic state pension. Additionally, you may be able to inherit part of your spouse or civil partner’s additional state pension or graduated retirement benefit.
On the other hand, if you are on the new state pension, you cannot make a claim for your partner’s national insurance qualifying years. However, if your partner built up more than the full amount of state pension, the additional amount is a "protected payment," half of which can be passed to your spouse or civil partner.
Private Pensions
Private pensions can be either defined benefit or defined contribution pensions. Defined benefit pensions are typically only available from public sector or older workplace pension schemes and pay a retirement income based on your salary and the length of time you made contributions to your employer’s pension scheme.
Defined Benefit Pensions
If you have a defined benefit pension, the money paid to your beneficiaries will be outlined in the scheme’s rules, but often a spouse will receive around 50% of the money. Your children may also be eligible to receive a percentage of the pension you were getting if they are under 23 and in full-time education or mentally or physically impaired.
Defined Contribution Pensions
With defined contribution pensions, any money left over can be paid to beneficiaries in a few ways. They can withdraw all the money as a lump sum, set up a guaranteed income, or set up a flexible retirement income. If you choose the annuity route, it depends on which type you bought, as a joint life annuity can be passed to a second person, whereas a single life annuity dies with you.
Tax Implications
Pensions are not currently subject to inheritance tax, but this will change from April 2027, when almost all lump sum death benefits will be subject to inheritance tax rules. Inherited pensions can also be subject to income tax, depending on the age at which you die and the type of pension you have. If you die before 75, there’s no income tax on defined contribution pensions or drawdown, unless the lump sum and death benefit allowance has been exceeded.
Conclusion
In conclusion, what happens to your pension savings when you die is a complex topic that depends on various factors. It’s essential to understand the rules and regulations surrounding your pension to ensure that your beneficiaries receive the money they are entitled to. By nominating beneficiaries and understanding the tax implications, you can help secure their financial future. It’s also crucial to seek professional advice to ensure you make the most of your pension savings and minimize any potential tax liabilities.
