What happens to your private pension when you die depends on the plan itself, the age that you die and whether you started to take income from the pension.
There are essentially two types of private pension – final salary/defined benefit pension or a defined contribution/personal pension.
Expression of Wish form
Many people do not realise that their private pension is outside of their estate which means that it can be inherited by your loved ones free from Inheritance Tax. However, pensions being outside of your estate means that they are not included in your Will and it is very important that you complete an expression of wish form with each pension provider that you have to nominate who you wish to inherit your pension when you die. Your executors can then use these forms to follow your wishes. You can nominate as many beneficiaries as you like.
This is only for defined contribution/private pensions. Not for a defined benefit pension.
If you do not complete an Expression of Wish form, then the pension administrators need to determine who the beneficiaries are which can be a very time-consuming process and may mean that your pension is not left in the way that you wanted.
If you die before taking any pension income
If you die before you started taking income from your pension, then the pension funds may be paid to your estate or your beneficiaries. In this case, the beneficiaries may be able to choose to receive the pension funds as a lump sum or as regular payments, but it does depend on the pension provider. Your beneficiaries will have to pay income tax at their marginal rate on any money that they receive.
What happens to a final salary/defined benefit pension when you die?
A defined benefit pension is also known as a final salary pension and pays you a guaranteed income each year in your retirement. Usually when someone with a defined benefit pension dies, 50% of the pension income they were receiving each month continues to go to their spouse. If their spouse is already deceased, then usually the income stops completely and there is nothing for their family to inherit but it does depend on the individual scheme.
Review your pensions
Pension rules and allowances are complex, at Four Wealth Management we can help make sure that you are leaving your pensions to your loved ones in the most tax-efficient way possible.
To review your existing pension arrangements, you can book in a no-obligation meeting with one of our financial advisers online or call us on 0117 973 0500. Meetings can be at your home address, at one of our offices or on zoom.
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.
