What happens to a personal pension when a person dies?
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
It will not be something that you want to think about but when you die your personal pensions could provide benefits to your financial dependants. However, pensions don’t just sort themselves out automatically once you pass away, so it’s important you know what could be done to ensure those closest to you get access to the funds you’ve worked so hard to build up in your pension pot over the years. Here at True Potential Investor, we’ve created this handy guide to help you…
When to nominate a beneficiary
Most UK pension schemes allow members to nominate specified beneficiaries. By nominating a beneficiary before you even begin to claim your pension pot this means that you choose a person, a group of people, or an organisation that you wish your pension funds to go to in the event of your death.
It’s important that you inform your pension provider of your decision, as well as how you’d like to see your pension savings shared out if you’ve picked more than one beneficiary. This must be done by filling in an ‘Expression of wish’ form. A pension provider will also need to have the correct details for each beneficiary, so ensure you’ve checked these and get them updated whenever it’s necessary to do so.
What to do if you’re in serious ill health
If you become seriously ill to the point where you are expected to have under 12 months left to live and are under the age of 75 years old, if you don’t have more than the lifetime allowance there may be the opportunity after checking the terms of your pension with your provider to take your entire pension fund as a tax-free lump sum.
Should you become seriously ill and be aged 75 years old or over, there is still the possible chance of taking the rest of your pension as a cash lump sum. In this scenario, however, the money will be added to your income and then taxed accordingly.
You can find out further about ill health and its effects on your pension via this page of the GOV.UK website.
When you’re already being paid from an annuity
There is a chance that you will use some of the funds in your pension account to purchase an annuity, which is a financial product that pays you an income for the remainder of your life.
When you die though, your Pension Annuity or Enhanced Pension Annuity will come to an end unless one of the following four elements applies to you:
- You’ve arranged for an income to be paid to a dependant who is still alive after your death.
- You die within the first 90 days of your annuity plan’s start date. If this is the case, value protection will be applied if your annuity had this feature and a lump sum will be paid to your estate. In the event that you have a dependant on your plan, the lump sum will only be paid if you both die within this 90-day period. If this is the case, the lump sum will be paid to the estate of the last one of you to die.
- You die after the first 90 days of your annuity plan’s start date but within your guarantee period. If this is the case, payments will continue to be made until the end of that guarantee period — being paid to either your estate or a dependant that’s recognised on your policy.
- You have selected for your value protection to continue beyond the first 90 days of your annuity plan’s start date. If this is the case, there is the possibility that a lump sum can be made payable to your estate or the estate of your dependent.
So far, we have covered what someone who has opened a personal pension account could be doing with their pot. However, the sections to come cover the steps to consider when someone close to you has died and they had pensions.
How to sort out a person’s personal and workplace pensions after they die
In the event that you’re responsible with dealing with someone’s affairs after they die, you should take the time to go through their paperwork and make a note of any personal and workplace pension schemes that they had in place.
For each pension scheme that you come across, get in touch with the contact provider and discover how much they had in their pot and the next steps that you have to take. Should the person who has passed away have been employed at the time of their death, you can also contact who their employer was to learn if they were part of a workplace pension.
Take note that the amount that can be claimed and when this can be done will depend of the type of pension, with specific focus on whether any of the schemes are either defined contribution pensions or defined benefit pensions.
What happens to their defined contribution pensions?
When inheriting a defined contribution pension, different tax rules will apply to the rules and circumstances will change depending on whether the person who set up the pension died before or following their 75th birthday.
If they were under the age of 75 years old when they died
In the event the person had a defined contribution pension and died before they reached their 75th birthday, then the following will have to be considered:
- Income received from a single life annuity will stop unless the annuity had a guaranteed period attached to it, whereby the income will continue to be paid tax-free until the guaranteed period comes to its conclusion.
- Income from a joint life annuity will continue to be paid tax-free to the person in the annuity who is still alive up until their death. It is often the case that this income will be at a reduced rate though.
- If a flexi access drawdown pension had been taken out by the deceased and this had been set up or initially accessed after April 5th 2015, then any money paid within two years of the pension holder’s death will be paid tax-free. Should the pension be claimed over two years after the pension holder’s death though, then tax may need to be paid.
- All money that was withdrawn from the pension scheme before the pension holder’s death, as well as any investments purchased with money from the pension scheme, will become part of the deceased’s estate. Therefore, they may be subject to Inheritance Tax.
- So long as the money remains invested, all cash in the pension scheme will continue to grow in a tax-free manner.
If they were 75 years old or over when they died
In the event the person had a defined contribution pension and died after reaching their 75th birthday, then the following will have to be considered:
- Income received from a single life annuity will stop unless the annuity had a guaranteed period attached to it, whereby the income will continue to be paid, though with income tax applied to the payments, until the guaranteed period comes to its conclusion.
- Income from a joint life annuity will continue to be paid to the person in the annuity who is still alive up until their death, though income tax will apply
- All money that was taken as a lump sum, as an income through a flexi-access drawdown scheme or via a pension pot that was untouched will be included within the beneficiary’s other income. Once applied, this money will be taxed in the normal way.
What happens to their defined benefit pensions?
The way that a defined benefit pension pays out will depend on whether the person who has died with this pension in place had retired at the time of their death.
If they hadn’t retired when they died
In the event the person had a defined benefit pension and died before they had retired, then the following will have to be considered:
- The majority of these pension schemes pay out a lump sum which is typically two or four times their salary in this circumstance. If the person with the pension was under 75 years old when they died, then this lump sum will be tax-free too.
- A taxable ‘survivor’s pension’ is often applied in this circumstance, which is paid to the spouse, civil partner or dependent child of the deceased.
If they had already retired when they died
In the event the person had a defined benefit pension and died before they had retired, it will usually be the case that the spouse, civil partner or other dependant of the deceased with the pension will receive a reduced pension until they die.
Factoring in lifetime allowance
There is a chance that you will have to pay more tax on any pension savings which you inherit when the total value of all the pensions savings accrued by the deceased is above the lifetime allowance limit. For the 2018/19 tax year, this limit is set at £1,030,000.
Please don’t hesitate to get in touch with our expert in-house team if you still have questions regarding to anything related to pensions.