You work hard until the time for retirement comes and you do your best to ensure that your pension pot will allow you to enjoy a comfortable retirement.
If
you have concerns over what becomes of your pension after your death
then we can assure you that you are not alone. This is a concern for
many but, for understandable reasons, it is something we shy away
from discussing. If you want to know what will happen to your pension
when you die and if your loved ones will be provided for, then our
article is here to help.
What
happens to your state pension when you die?
Your
state pension is made up of your National Insurance contributions
during your working life. In order to be awarded the maximum State
Pension, you will need to have contributed for 35 years. The good
news as far as a state pension is concerned is that it does not
automatically die with you.
If
you have a spouse or a civil partner it is possible that they are
able to access extra payments from your state pension. How much they
may be able to get will depend upon the National Insurance
contributions that you have made as well as the date at which you
reached state pension age. There are several possibilities when it
comes to your state pension and we will explore these below:
Allowing
your Basic State Pension to be inherited
If
you have reached State Pension age before 6th April 2016 then your
spouse or civil partner who is left behind will need to contact the
Pension Service so that they can check what they are entitled to. If
your spouse or civil partner is receiving a full State Pension
themselves it could be that your qualifying years are used to boost
their pension.
If
you reach State Pension age after 6th April 201, or if your civil
partner or spouse is under state pension age when you die, there is a
tool that can be accessed on the UK
Government website that allows them to check their entitlement.
What if I have
deferred my State Pension?
Some
people choose to defer their State Pension so that it can continue to
build in value. If this is something that you have chosen to do it is
possible that your spouse or civil partner will stand to benefit when
you die. It could be that they get to claim the extra State Pension
or they may be awarded a lump sum.
What about State
Pension top-ups?
You
may have chosen to top up your State Pension and have concerns around
what will happen to this when you die. It may be reassuring to know
that your spouse or civil partner may be able to claim either some or
even all, of the top-up.
What happens to
Additional State Pension?
With
Additional State Pension, what happens after your death will depend
on a few factors. Firstly, you will need to have been married or
entered into a civil partnership before 6th April 2016. If this is
the case, your spouse or civil partner will be able to inherit part
of your Additional State Pension if:
-
You
reach State Pension age before 6th April 2016, or
-
You
die before 6th April 2016 but you would have reached the State
Pension age after that date
Of
course, as you are reading now it is only the first of those points
that will apply!
What happens if I
am single or divorced?
Everything
that we have seen so far with the State Pension relates to a spouse
or civil partner so you may be wondering what happens if this doesn’t
apply to you. That being the case, it is possible that your estate
can claim part of your basic State Pension.
What happens to
your private pension when you die?
As
well as considering your State Pension it is possible that you also
have a workplace pension or that you have set up a pension of your
own. This could be in the form of a SIPP or maybe a self-employed
pension. When looking at these pensions there are usually two main
types: defined contributions and defined benefits. Exactly what
happens to your private pension when you die will depend upon the
type that you have.
Defined
contributions pension
There
are two key considerations when it comes to these types of private
pensions. The first is how old you are when you die and the second is
if you have already started to draw your pension. If you pass away
before you reach the age of 75 and have not started to draw your
pension you are able to pass these to your beneficiaries and it will
be free of tax.
Your
beneficiaries will have two years after your death to claim your
pension. If they fail to do this they may find that tax is applied.
Your beneficiaries can take a lump sum from your pension, invest it
into a drawdown pension, or purchase an annuity.
If
you die before the age of 75 but have started to draw your pension
then the rules are a little different. If you have taken a lump sum
and have funds left, this will sit outside of your pension and become
part of your estate. If you have opted to drawdown then your
beneficiaries can access what is left, tax-free.
You
may have an annuity and you may have started receiving an income from
this. If you have then usually this can’t be passed to your
beneficiary. There are annuities where there are exceptions and you
are best to seek advice on this matter.
If
you die after you reach the age of 75, any pension that you leave
behind will be subject to tax.
Defined benefits
pension
These
types of pensions are linked to your salary and how long that you
have worked for an employer. These work differently from defined
contribution pensions and the main rule around these is linked to
whether or not you have already retired by the time that you die.
Dying
before retirement will see your pension payout 2-4 times your salary.
Providing you are under 75 when you die, this payment will be
tax-free. Usually, there is also a survivors pension. This can see
your civil partner, spouse, or dependant child receive a pension but
this will be subjected to tax.
Based on tax legislation at the time of publication. Please be aware that there will have been changes since this was published. Speak to your adviser for the most up to date information.
