Knowing what happens to your pension provisions when you pass away and the potential tax implications can be complicated. The below information outlines current pension rules around what can happen to your pension after you die.
Regardless of the type of pension scheme it’s important to ensure you have an up to date ‘expression of wishes’ or ‘death nomination form’ with your pension providers. Pensions are normally written in trust and it’s the pension trustees’ responsibility to distribute the remainder (where possible) of your pension fund after your death. The provider would normally check the wishes they have recorded on file first, so it’s really important to keep your nominations up to date, particularly if there have been changes to your personal circumstances.
What happens to your pensions after you die depends on
How your age affects your pension when you die
Age 74 or younger:
If you pass away before you are 75 then your remaining pension fund, as at the date of your death, will usually pass to your nominated beneficiaries tax free. This can usually be paid as a lump sum or in instalments, regardless of whether you have taken benefits from your pension already or not.
AND you haven’t taken any benefits from your pension fund yet (Tax free cash / and or Income)
AND the value of your total pension exceeds the lifetime allowance (which for the 2022/23 tax year is £1,073,100), then your beneficiaries may have a lifetime allowance tax charge to pay.
Age 75 or older:
If you pass away when you are aged 75 or older your remaining pension fund as at the date of your death will usually pass to your nominated beneficiaries, who will be taxed at their marginal rate of income tax.
The rules specify that there is a two-year period after your death, during which the distributions from your pension fund need to be completed in order to qualify for this tax treatment.
Other taxes to consider
Usually the assets within your pension fall outside of your estate and are not subject to inheritance tax. If you have taken your tax-free lump sum out of your pension before you die and haven’t spent the money yet e.g. it’s in your personal bank account, then this sum would become part of your estate.
Types of rules around different pension funds
The treatment of the remaining benefits after death will likely differ depending on other types of scheme. Here are some examples of other types of rules around different pension funds.
If you have purchased an annuity before you die:
Usually annuities stop when you die, as they are designed to pay a regular secure income during life. However, some policies can be chosen with a guarantee period chosen at the outset. This provision means they will pay the balance of the annuity due during that set period if you died before the end of that guarantee period.Normally, it’s not possible to change your annuity options or cancel it once you’ve set it up, so ensure you check the policy thoroughly before purchasing.
State pension after death:
If you’re married or in a civil partnership, your husband, wife or civil partner may be able to claim some of your state pension payments after you die – provided they’re over the state pension age. What they could get and how they can get it depends on whether they reached state pension age before or after 6th April 2016 and their national insurance contributions. Learn more about what happens to your state pension after you die.
Terminal illnesses and accessing pension benefits
Although it’s normally permitted to access your pension fund from age 55 currently, it is also worth knowing that it can be possible to access pension benefits if you have been diagnosed with a serious health condition too.
Check each of your pension providers have an up-to-date ‘expression of wishes’ or ‘death nomination form’ for your pensions with them.
Need a professional?
Nutmeg has a financial advice service, which offers fully regulated investment, pension and tax planning advice.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A pension may not be right for everyone and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice. Please note that during any transfer, your investments will be out of the market.