Article What happens to my pension when I die?

Being able to provide financial security for your loved ones is an important task for most of us, which makes understanding the rules around inheriting pensions a key part of financial planning. In this article, we’ll answer some of the questions you might have about what happens to your pension when you’re no longer here, and how you can pass on your pension if you choose to do so. We’ll also explore what some of the rule changes to inheritance tax and pensions mean following the Labour Government’s October’s Budget announcement. 

Types of pensions and inheritance rules

There are two main types of pension schemes in the UK – defined benefit (DB) and defined contribution (DC). They have different rules when it comes to who can inherit them and under what conditions. If you’re unsure about anything, reach out to your pension scheme administrator. 

• Defined contribution 
  If you die with money left in your defined contribution pot (a pension that pays out based on what you and/or your employer has paid in over time), your beneficiaries might be able to withdraw it all as a lump sum, or buy an annuity with the proceeds, which would give them a guaranteed income for life. They might also be able to set up flexible income drawdown, which means they leave the money invested and take income from it when required.

• Defined benefit
  When it comes to a defined benefit pension (a pension that pays a guaranteed income), each scheme will have its own rules for when the member dies. For instance, some schemes might pay a percentage of your pension to your spouse/civil partner, children or other dependants under certain conditions. Check with your pension scheme administrator to find out what your beneficiaries might be able to claim when you die.

Remember, the value of an investment can fall as well as rise and isn’t guaranteed. The value of your pension pot when you come to take benefits may be less than has been paid in.

State Pension

Usually, your State Pension will stop being paid once you die. But, if you have a spouse or civil partner, they might be able to inherit some of your State Pension. What happens will depend on both of your ages and your National Insurance record. Check out MoneyHelper’s site about What to do about someone’s pension when they’ve died for more information. 

Annuities

An annuity provides a regular guaranteed income during retirement. If you have a single-life annuity, payments stop when you die. If you have a joint-life annuity, your chosen beneficiary (usually a spouse or civil partner) will continue to receive an income from the annuity. Depending on what choices you made when you took out the annuity, there may be other death benefits paid out. Some annuities offer a guarantee period and, if you die within this time, it will continue to pay out to your beneficiaries. You may have opted for value protection, which would mean some of the amount used to buy the annuity is paid out to your beneficiaries. As annuity rates can change substantially and rapidly, there is no guarantee that when you do purchase an annuity the rates will be favourable. This could mean that your pension thereafter may be less than you hoped for.

The MoneyHelper website provides more detailed information about what happens to different types of pensions when you die.

Tax implications

Under current rules, if you die under the age of 75, your beneficiaries can inherit your pension tax free. If you die over the age of 75, whoever inherits your pension will normally need to pay income tax on it at their marginal rate.

Inheritance tax considerations

Under changes proposed in the 2024 Autumn Budget, most unused pension funds and death benefits will, from 6 April 2027, be included within the value of a person’s estate for inheritance tax purposes. This means when someone (other than a spouse or civil partner) inherits a private pension and inheritance tax is due, it will be taxed at 40%. ¹

It’s worth remembering that most estates are not subject to inheritance tax because there are various allowances and reliefs which let you pass on wealth tax free. For instance, the first £325,000 of your estate is not subject to IHT as set out on GOV.UK’s website.¹

However, it can still be good to factor these changes into your estate planning. You may need time to implement legitimate ways of reducing your IHT liability, such as using your gifting allowances and exemptions, making larger gifts which become exempt after seven years, creating a trust or considering investing in Alternative Investment Market (AIM) shares. This means investing in small, growing companies listed on the AIM and getting tax relief if you own the shares for at least two years and still own them on death. In the Budget, it was also announced that the inheritance tax relief available on qualifying AIM share investments would drop to 50%.² The value of any tax relief will depend on individual circumstances, which may change.

You can get advice from a qualified financial adviser to help with your decision-making. MoneyHelper has some guidance on choosing a financial adviser and how much it could cost.

This information is based on our understanding of current taxation law and HMRC practice, which may change.

Nominating a beneficiary

When you become a member of a pension scheme, you’ll be asked to name one or more beneficiaries who you would like to inherit your pension fund when you die. You should check and update these details regularly to make sure you’re happy with your nominees and that their contact details are still correct. If you’re not sure where to find the form, ask your current or previous employer.

How your loved ones can access your pensions funds 

When you die, your beneficiaries can contact the administrator of your pension scheme, or your employer if it’s a workplace scheme, to find out how to claim your pension funds. How long it takes to make a claim and receive funds can vary.

They should contact the Department for Work and Pensions about your State Pension.

Other practical tips

Some practical things to consider when estate planning for a streamlined inheritance process.

• Record-keeping – make sure you record when, to whom and how much you give as gifts so your executors can easily report this to HMRC when you die.
• Keep your will up-to-date and make sure the right people know where it is. 
• Nominate your executors and make sure they’re happy to take on this role.
• Securely keep an up-to-date list of assets and debts, pension / investment /savings account providers. A folder of relevant details such as account numbers and contacts will make administering your estate easier for your executors.
• Consider taking out an insurance policy to cover any IHT due.

Make sure your pension savings go to your loved ones

Thinking ahead could make it easier to pass on your pension savings to your loved ones when you’re no longer around. By understanding your options, updating beneficiaries, and getting financial advice, you could make sure your savings are passed on efficiently, giving you and your family peace of mind.