What happens to your pension when you die?

SJP What happens to your pension when you die

Choosing what you would like to happen with your retirement savings in the event of your death is an important part of your retirement planning. 

There is a great deal of choice and flexibility, particularly with defined contribution pensions, as well as tax implications that need to be included in any decisions.

Retirement death benefits can be complex and with so many options, advice is essential to ensure that your wishes are followed, and your retirement savings are passed on to your loved ones in the way you would like.

In most cases, Defined Contribution pensions fall outside of your estate for Inheritance Tax purposes, which means that your retirement and estate planning should go together.

Defined Contribution pensions

Your pension will be treated in the same way on death whether you are still accumulating your funds, or drawing down on them. The main difference is the tax treatment depending on whether death occurs before or after age 75.

Before age 75

Benefits can be paid as a lump sum, drawdown pension or annuity to any beneficiary, tax free. Any lump sum payments on death not made within 2 years, may be subject to tax at the beneficiary’s marginal rate.

After age 75

Benefits can be paid to any beneficiary, as a lump sum, drawdown pension or annuity, taxed at the beneficiary’s marginal rate of income tax.

There are further rules that your St. James’s Place Partner can help with, such as how any lifetime allowance test might apply. 

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Defined Benefit pensions

There are separate rules that apply to Defined Benefit scheme pensions, which means that any dependant pension that is paid out on death will be taxed at the beneficiary’s marginal rate. 

If you have a Defined Benefit pension, the scheme administrator should be able to help confirm the death benefit rules specific to that scheme. It is also worth keeping your nominated beneficiaries up to date, as the scheme trustees will use this to pass on your benefits in the event of your death.

Annuities

The same death benefit rules apply for annuities for tax treatment depending on if you die before or after age 75. So, before age 75, income payments are tax free, if death is after 75, the income is taxed at the beneficiary’s marginal rate of income tax.

There were some changes introduced following the pension freedoms, removing the need for benefits being paid to a ‘financial dependant’. Now the income can be paid to any beneficiary. Also, guarantee periods are no longer limited to 10 years, and many annuity providers can now offer periods up to 30 years.

A ‘guarantee period’ is another option to ensure income continues to your loved ones in the event of your early death. 

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

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State pension

Depending on when you reach, or if you have already reached your state pension age, some of your state pension may be passed to your spouse or civil partner when you die.

A new state pension system was introduced in April 2016 and transitional rules are in place which can complicate matters.

State pension age prior to April 2016

If you reached your state pension age prior to April 2016, then your spouse or civil partner will be entitled to some of your basic state pension, depending on your national insurance contributions record.

State pension age after April 2016

If you reached state pension age after April 2016, then your spouse or civil partner may be able to inherit an ‘additional payment’ that is added to their existing state pension.

Lasting Power of Attorney and Wills

We can all recognise that as we get older, the ability to process complex information and make crucial decisions may decline.

In addition, you may experience a gradual decline in tolerance and capacity for risk and it’s crucial to factor this into your regular reviews, so that your investment expectations and financial goals remain realistic.

There are two main types of Power of Attorney, which are legal documents that serve different functions, but essentially are a way to ensure that a trusted person is able to make crucial decisions for your financial (or personal) wellbeing when you are no longer able to.

This doesn’t replace a Will, which is essential to also have in place as part of your estate planning.

Lasting Powers of Attorney and Wills involve the referral to a service that is separate and distinct to those offered by St. James's Place and are not regulated by the Financial Conduct Authority.

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