Death Benefits and your pension

Pensions are an efficient way of providing income in the latter part of life. As the years pass, what happens to our finances once we are gone becomes an important consideration. A lifetime’s worth of saving could mean that your pension is a significant part of your financial legacy. Who receives the remainder of your fund and how it is distributed is called Death Benefits.

Your spouse, civil partner, or other beneficiaries may be able to access your pension after you have died. This will depend on the age you are when you pass and what kind of pension arrangements you have.

Understanding what happens to your pension once you pass can provide peace of mind to you and those you may leave behind. Here we will explore the different rules for Death Benefits and how this applies to your iSIPP.

What happens to my pension when I die?

In 2015 there was an overhaul in the pension rules which changed the way people could access their pension. Out of the many rule changes, the government reconsidered what happens to pension funds after death.

If your pension is under a discretionary trust (like iSIPP) your pension is now classed as being outside of your estate. This means your beneficiaries, in most circumstances, won’t pay inheritance tax when accessing your pension.

However, they may pay income tax on benefits they receive. This will depend on the type of pension you have and your age when you die. However, your beneficiaries do not have to access your pension, they can choose to transfer the fund into their own name and grow the pot over a number of years, passing on the pension when they die as well.

iSIPP is a Defined Contribution pension, therefore, we will mainly focus on the rules surrounding Defined Contribution pensions in this article.

What are the tax rules for my defined contribution pensions when I die?   

Defined Contribution pensions are the most common type of pension. With Defined Contribution pensions, the value of your pension relates to how much you pay in throughout life as well as how well your investments perform.

How (and if) tax charges apply to your beneficiaries depends on the age you die and whether you’ve already been drawing your pension.

Below is a summary of the different possible scenarios and how this will affect the tax paid by beneficiaries.

Scenario 1 – If you die after your 75th Birthday.

In this scenario your beneficiaries would have to pay UK income tax on Death Benefits and this would be taxed at the survivor’s marginal rate of tax.

Scenario 2 – If you die before your 75th Birthday and…

• You have not been drawing your pension. Your beneficiaries can access your pension tax free. They will have two years to claim. Beyond this point they may be charged tax. The pension can be accessed via drawdown payments, a lump sum or by buying an annuity.

• You have been drawing your pension through drawdown. Your beneficiaries can access what remains of your pension tax free either by drawdown payments, a lump sum or by buying an annuity.

• You have withdrawn a lump sum and have cash remaining in your bank account that is not part of your pension. This will count towards your estate and inheritance tax rules will apply.

• You have purchased an annuity and started receiving income. Usually this will pass to a spouse or partner. However, there are some types of annuities that do allow pension transfer after death to any other beneficiaries. Your beneficiaries should contact your annuity provider for full details.

How do I ensure my pension gets passed on when I die?

It is important that you let your pension provider – such as iSIPP – know who you wish to nominate as your beneficiaries. At iSIPP you can do this by completing a new nomination form at any time.  We will then decide how and who will receive your Death Benefits, taking into account your wishes.

Can I pass on my state pension when I die?

Your spouse or civil partner may be able to receive some of your State Pension payments after you die. This depends on when you reached state pension age. You can read more on the rules surrounding state pensions at the UK Government website here.

Disclaimer 

The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

This notice cannot disclose all the risks associated with the products we make available to you. When making your own investment decisions it is important you understand that all investments can fall as well as rise in value and it is possible you may get back less than what you have paid in. You should also be satisfied that any investments you choose are suitable for you in the light of your circumstances and financial position. You should seek financial advice if you are not sure of what’s best for your situation.