What Happens to your Pension When you Die?

Monday, 23 May 2022

No matter your age or how far along you are in your career, whether you’ve just started out or are approaching retirement, having the understanding and peace of mind of what happens to your pension can be incredibly reassuring. 

There is a lot of confusion surrounding the topic of pensions and what were to happen to your pension when you die, and for people with children, spouses, or other beneficiaries to support, it's important to know exactly what would happen to your finances. 

To explain, Michael Reed has answered some of the most commonly asked questions surrounding pensions and death.  

Before we begin, it is worth mentioning that upon death, all pensions are free of inheritance tax; however, there are some other considerations you should know.  

What happens to my pension if I die before 75? 

Should you die before reaching 75, typically, a lump sum will be paid to a beneficiary or dependant. All payments to individuals will be subject to the trustee's discretion. 

Usually, this is paid tax free, providing the pension scheme pays out the funds within two years of death. 

Should you die before 75 and your nominees withdraw from the proceeds as either a lump sum or take an income, it will be tax free. 

As mentioned previously, there are no strict rules surrounding retirement age; however, should you die before reaching your desired retirement age, the same rules should apply.  

What happens to my pension if I die after 75? 

Should your death occur on or after reaching 75, a lump sum will also be payable to your beneficiaries. However, those payments will be subject to the nominee’s marginal rate of tax. 

Marginal rate of tax is determined by the percentage of tax paid on the earnings for the next pound earned. 

What happens to my workplace pension when I die? 

This entirely depends on the workplace pension scheme you have been paying into and whether or not you’ve received any pension benefits. 

For example, a defined contribution pension may pay out the entire value of your pension pot as a lump sum. 

A defined benefit pension may pay a sum to your spouse or partner, or in some cases, your children (until they leave full time education).  

Should you die while paying into a workplace pension, your dependents may receive a sum as part of life cover. 

Who gets my pension if I die? 

You can choose to nominate anyone to receive the sum of your pension upon your death.  

However, it is important to remember that the decision regarding the receival of the funds is down to the discretion of the provider or trustees who are in charge of looking after the pensions. 

If you have completed an Expression of Wish/Nomination form, they should take your wishes into account when making their decision and releasing the funds. 

What happens to your private pension when you die? 

When you die, your beneficiaries have a few options as to how they can proceed with the funds.  

For example, they can withdraw the amount as a lump sum, set up a guaranteed income or annuity with the proceeds, or even set up a flexible retirement income, often called a pension drawdown

Anyone can receive your private pension regardless of the age in which you pass, with the tax-free rules above still applying should you pass before your 75th birthday.  

Do you need help organising your pensions? 

Trying to understand your pensions and getting your financial affairs in order can be a daunting task to do on your own, especially if you have a large sum of money to deal with. 

At Michael Reed Wealth Management, you will be provided with sound and genuine advice regarding your pensions, ensuring you can always make well-informed decisions regarding your finances. 

To discuss this in more detail, please get in touch today.  

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Michael Reed

Michael Reed is a Chartered Financial Planner with years of experience, providing financial advice with both conviction and empathy.

Dedicated to maximising wealth, minimising tax and protecting individuals and businesses against financial risk, Michael has expertise in specific areas of wealth management including pensions, ISAs, investment planning and shareholder protection.