What happens to my pension when I die?

A common question among pension holders is “What happens to my pension when I die?”

To put it simply, when someone dies the value of their estate is inherited, including your pension.

However, starting in 2027, your pension pot will form part of your estate. Therefore, if you inherit an estate worth more than £325,000, including any pension pots, they may be liable for a 40% inheritance tax bill.

For most pensions, if someone dies, the remaining value of the pension goes to those who inherit the estate. Before we explain further, remember there are two types of inheritors, a dependant or a nominee.

What is a dependant?

Generally, a dependant is a person who relies on the pension holder financially, this could be your spouse, civil partner, or other type of long-term partner. Some pensions will allow children under the age of 23 to be dependents.

This can change under certain conditions in the HRMC’s pension guidelines.

• According to the scheme administrator's policies, a child (legally adopted) member aged 23 or older may qualify under certain conditions. If they were dependants due to any physical or mental impairment on the date of the member's death.
• They can also be dependent, if any child is aged 23 or older and matches any of the transitional provisions under the Dependants’ pensions from schemes in existence on 5 April 2006.
  
  

What is a nominee?

Anyone can be a nominee, even though they are not dependants and you can also name a charity. A person can become a nominee if they are on the list by the scheme administrator upon the death of a dependant. However, the nomination may be valid only if there is no other nominee alive or has been on the list prior. Although, if someone is on the list as a nominee but also a dependant then they will treat him as a nominee.

When someone dies what happens to their pension?

There are many different types of pensions in the UK, many of which have different claims upon death.

State pension

If you have a state pension, then after your death the pension will stop paying. However, your partner or spouse might be able to get a small share of the state pension. But there are some rules, that might depend on it.

1. How much have you and your partner both saved up?
2. Did you reach the state pension age before or after April 6th, 2016?

For more information visit GOV.uk and use their State Pension Tool to check if you are eligible.

Private or personal pension

For a private/personal pension then your inheritors may be able to claim some of it. But there is a catch, starting in 2027 your pension will form part of your estate.

Typically, if you inherit an estate worth more than £1 million then you will be liable for a 40% inheritance tax bill for anything exceeding this amount. Although, small estates over £325,000 inherited from a single person may be eligible for inheritance tax.

If you are looking for a new personal pension scheme to join then you can talk to a financial advisor. Feel free to use our services If you want to find a financial advisor in your city.

Defined benefit pension

If you have a defined benefit pension, you will usually receive only half of the total sum. However, only your spouse can claim it, and your children will not receive anything after they pass.

Annuity purchase

Firstly, there are two types of annuity purchase contracts: single life and joint life. A single annuity pays only for your lifetime and stops after you die.

However, a joint annuity will continue to pay to a spouse, partner, or other dependents even after your death. Joint life provides much less income than single life because it only pays without a dependant.

These are very significant decisions in your life, that could lead to further unwanted outcomes. So, if you are uncertain about what you should do then what better to do than seek a financial advisor. If you want to find an FCA regulated advisor in your local area then click here.

Can my children inherit my pension?

If you were to pass on your pension to your family, you may now be liable for a 40% inheritance tax.

The new government has issued a new reformed bill that will allow pensions to be included in your estate. From 2027, anything in your pension will also be part of your estate and subject to inheritance tax.

Getting a pension that offers death benefits

The easy solution would be to get a pension that pays the sum after your death, such as a defined benefit scheme. These pension plans will allow you to select a nominee, who will inherit the pension after you are gone. If available, they can also offer you other benefits on how you can take the assets. 

Although, you must remember that some pension providers offer annuities that stop paying you soon after your death. Some also have policies that will not let the payable assets pass to anyone other than you even after death. 

List the inheritors of your pension

There are always benefits to making a will not to mention financial and emotional resentments that are best to avoid. But the truth is that your will cannot control who gets the pension savings such as a defined benefit pension scheme.

After your death, the control of your pension does not rely solely on you anymore. The pension providers and other administrative bodies within the body will be the ones who decide where it should go. 

They will take your wishes into consideration and be sure to list a few names who could be potential inheritors. However, they are not bound by it, so make sure that you list at least one person in your pension.

Most pensions nowadays will permit you to say which people will have access to the pension after your death. If you are an existing pension holder then this process begins with you requesting a nomination form. However, you can also update these details online as most standard life pensions have the option. 

Reviewing your inheritors

After you nominate your inheritors, it is not over as you need to update them regularly. Further, your mind may change due to either good, bad circumstances, or both. There are a few things, especially things like the birth of a newborn child, or grandchild may change your mind. 

However, there are other events like divorce, death, or personal issues that may force you to update the intended inheritor. Thus, it is vital that you keep your inheritor updated on a regular basis. As, if you don’t then it certainly will not go to the people you hoped for after your death.

The tax your inheritors must pay

Previously, pensions were a secure way to pass your savings to your inheritors. But after passing the new bill in 2027, pensions will now also be a part of your estate. Anything below £325,000 (£500,000 for estates that qualify) will not be eligible for inheritance tax. Also, a spouse or civil partner of a qualifying estate can pass up to £1 million, which cannot be liable for inheritance tax. 

However, if the combined estate exceeds the maximum value, they will be left with a substantial inheritance tax.

If you are unsure about how much tax your estate is liable for, it might be better to consult a financial advisor to avoid any future surprises. For more viable options you should consider talking to a regulated advisor. Moreover, you can search for a financial advisor here.

Does my pension last until I die?

Your retirement will depend on how long you live, around 20 years is the average here in the UK. In retirement, there may be various sources available to you for income. These are savings, your state pension, a personal pension, a self-invested personal pension or a defined benefit pension. However, only your state pension and a defined benefit pension scheme will last until you die.

Before you are sure that retirement is due, make sure that there is enough to last for your lifetime. If you want an estimate of life expectancy in the UK, use the calculator on the Office for National Statistics.

Tools like these can help you figure out what type of pension is best for you.

You don’t want to use up your money too quickly and risk not having enough later on.

On the other hand, you don’t want to live more frugally than you need to.

You also need to consider how inflation can affect how much money you’ll need to live on and how long your savings will last.

How long will your money last?

As few of us know how long we’re likely to live, this is difficult to plan. You may want to consider part-time work in retirement to supplement your income.

Generally, it’s a good idea to make sure you have enough guaranteed income that will pay for the essentials (such as your home, food and bills) for the rest of your life.

This might come from one or a combination of different sources.

Inflation

Prices tend to rise over time. So, if you want to maintain your standard of living you need your retirement income to keep pace with inflation.

The state pension increases by at least the rate of inflation each year. And if you get a retirement income from a past employer, this often rises by the rate of inflation, or a set amount each year.

If you rely on savings and investments to boost your income, you’ll probably need to increase the amount you take out each year if you want your income to go as far as it used to.

If you take more income than your savings and investments earn each year in interest, you will gradually eat into your capital. This means you risk running out of savings.

Secure income

This is income you can rely on for a set period or the rest of your life. The state pension is guaranteed for life. You might also be due pension income from a former employer if you were in a defined benefit pension scheme. This will provide you with a regular income for life.

You might have contributed to an employer or private pension scheme where you built up your own pension pot.

If you need to top up your guaranteed income, you could use all or some of any pension pots to buy an annuity.

Income from other sources, such as rental income, might provide a regular income but might not be fully secure. This means you might have times when you have less income coming in than you need. Consider how this might affect you. 

Flexible income

Do you have enough guaranteed income in retirement? Then you might choose to leave any pension pots you’ve built up invested and take a flexible income or lump sums from it as and when you need them.

Your pension pot has the opportunity to grow but there’s a risk that your investments might fall in value.

If you rely on this to provide you with an income, you might have to reduce the amount you take if your pot falls in value. Otherwise, you risk your money running out if you live for longer than you expected.

You can also take a flexible income from other savings or investments, but you need to monitor how much you take to make sure they last.

Considering the recent commotion and changes in pension regulations, the best suggestion is to spend all your money or put some of your assets into trust.

These are very significant decisions in your life that could lead to further unwanted outcomes. So, if you are uncertain about what you should do, what better to do than seek a financial advisor? If you want to find an FCA-regulated advisor near your area, click here to find a financial advisor.