How your pension can benefit loved ones
07
SEPTEMBER, 2022
Pensions
Your family could benefit from your pension savings after you are gone – it all depends on the type of pension you have.
For personal pensions, the rule changed in 2015 that gave everyone access to savings at age 55 which also included new measures for passing on your pension after you die.
Workplace pension schemes offer some benefits to families too, with some offering pension death benefits.
Passing on your pension
If you die before you turn 75 and haven’t touched your pension, the money can be passed to your beneficiaries tax-free.
In this case, the money can be taken as a lump sum, invested in drawdown or even used to purchase an annuity.
If you die before your 75th birthday, and have already started drawing your pension, the rules are different. The way you have chosen to access your savings will determine the action your beneficiaries can take. For example, if you’ve withdrawn a lump sum and you have remaining cash in your bank account outside your pension, this will be counted as part of your estate. But if you’ve opted for drawdown your beneficiaries can access whatever’s left in your pension entirely tax-free.
If you die age 75 or older, your untouched pension pot can be paid to your beneficiaries either as a lump sum or through beneficiary drawdown, or an annuity. All payments will be subject to income tax at their marginal rate, but not inheritance tax.
Expression of wishes
To ensure your pension gets passed on after you die it’s important to let your pension provider – private or workplace – know your nominated beneficiary – as well as their contact details. A nomination or expression of wish form clearly lays out who you would like your beneficiary (or beneficiaries) to be and should be updated to reflect any changes in circumstances – such as marriage or divorce.
The rules of your scheme
All schemes differ so it’s important to understand what beneficiaries are permitted to do with the money that’s rightfully theirs. Some schemes don’t offer the fund to be converted to income drawdown – and typically you can’t transfer a death benefit so moving to a provider that does offer drawdown won’t be an option.
You might also check whether beneficiaries are entitled to the whole value of accrued funds, or only part of them.
It’s worth checking on the way in which benefits are paid, as it could impact how they are taxed.
If they are left to your estate, they could be subject to inheritance tax. But if they are left under the discretion of the scheme trustees, inheritance tax can be avoided.
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Final salary pensions
If you die while an active member of your defined benefit pension scheme, your beneficiaries might get a lump sum. This is often a multiple of your salary.
If your pension is being paid, there’s often a guarantee period (usually 5-10 years).
If you die within the guarantee period, a lump sum might be paid to your beneficiaries.
GET ADVICE
Pensions can be complex so it can help to have an adviser on hand to do the investigatory work on your behalf. They can help with any restrictions on schemes and keep you up to date with any rule changes that are common with pensions.
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This Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person.
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