Passing on wealth to family is an important consideration for many people when looking at their financial planning. For those who have dependants, the ways you can pass on your pension may affect how you decide to take income from your pension.
Our Financial Advisers at Four Wealth Management are often asked what the rules are with regards to passing on a pension pot to loved ones. This depends on a variety of factors including the type of pension you have, how you have chosen to take income, whether you have told your provider who you wish to inherit your savings and the age that you die.
Here are the general rules:
If you have taken income from your private pension such as a SIPP (Self-Invested Personal Pension) through drawdown, made lump-sum withdrawals or left your pension untouched there are two options available to your loved ones to receive your pension wealth.
Your beneficiaries can choose to receive the pension as one-off lump sum or in stages as income.
If you die before the age of 75, your beneficiaries will receive your pension tax-free if paid as a lump sum or converted into the beneficiaries own name within 2 years of your death. If you die after the age of 75 it will be taxed as income of the beneficiary.
Another benefit of a pension fund is that it is outside of your estate, meaning there is no Inheritance Tax liability.
Letting pension schemes know who should inherit your pension
As your pension is outside of your estate, nominating a beneficiary for your pension usually isn’t covered in a Will. It is your responsibility to you to tell your pension provider who you would like to inherit your pension savings when you die. You can do this by completing an ‘Expression of Wish’ form.
It is important to review your nominations regularly as your circumstances are likely to change. You can nominate as many people as you like or choose to leave it to charity or trust. The scheme administrator has discretion over who receives benefits and in what form. If you haven’t filled in a form and have no dependants, the scheme administrator will decide what to do.
If you haven’t filled in a form and have no dependants, the pension trustees will decide what to do.
Defined benefit pension
If you have a defined benefit pension which is based on your final of average salary, they will usually pay a pension to your spouse or partner. Some defined benefit schemes also pay a pension to your children until they leave full time education.
Can I pass on annuity to my loved ones?
If you choose to buy an annuity with your pension pot, your monthly payments will stop when you die unless you chose certain options before taking out your annuity policy. These options include:
- Taking out a joint life annuity – income will be paid to your beneficiary if they outlive you.
- Choosing a guarantee period – income is guaranteed for a set number of years. If you die before the guaranteed number of years ends, the income will continue to be paid to your beneficiaries.
- Choosing to add value protection – the amount you paid for an annuity will be paid as a lump sum to your beneficiary, minus any income you have already received.
You usually cannot change the terms of your annuity after it is set up, so it is important that you take the time to fully understand the agreement and are happy with the options you have chosen before taking out an annuity. A Financial Adviser at Four Wealth Management can help you determine if an annuity is suitable for your individual circumstances.
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.