Pension beneficiary rules

Discover the pension beneficiary rules in the UK, plus what happens to your pension if you die.

If you’re planning for retirement, your top priority is probably how to use your retirement pot most effectively to let you enjoy your “golden years”. Another important part of any retirement plan is who will inherit your pension if you die before taking it all. That person is known as a pension beneficiary.

In this guide, we outline the pension beneficiary rules in the UK. We also answer common questions such as “How and when do I choose a pension beneficiary?” and “What happens if I die without nominating a pension beneficiary?”.

What is a pension beneficiary?

Your nominated pension beneficiary will receive your unused personal or workplace pension when you die (the rules for the state pension work differently). You can name your beneficiary in a pension or life insurance nomination form or set out your wishes in a will.

Do I need to nominate a pension beneficiary?

Many pension schemes will ask you to nominate a pension beneficiary using a nomination or “expression of wish” form. You’re not obliged to nominate a beneficiary. However, if you don’t, it’ll be down to the pension provider to decide where your pension assets will go. This could mean them going to someone you hadn’t planned them to.

Can I nominate anyone I like as a pension beneficiary?

That depends on what type of pension you have. If you have a defined benefit pension, the rules of the scheme may mean that any ongoing benefits must go to your spouse, civil partner or, in some cases, a dependent partner that you live with.

If you have a defined contribution pension, your options are more flexible. You can nominate whoever you like to receive any of your pension pot that remains unused. Often, your beneficiary will be an individual – such as a partner or child. You can also nominate an organisation. For example, you may wish to leave your pension pot to a charity.

Can I nominate more than one pension beneficiary?

If you have a defined contribution pension, then yes. You should give details of all beneficiaries in your expression of wish form, and specify how you would like your remaining pot shared out. For example, you could state that you wish for it to be divided equally between beneficiaries.

How and when do I choose a pension beneficiary?

You can choose anyone you wish as a pension beneficiary. Your pension company will usually send you an expression of wish or nomination form when you first open your pension. The pension company will keep a record of your wishes and take them into account when paying death benefits.

If you don’t get round to nominating a beneficiary when you open an account, then you can ask to fill in a form at any time.

The pension company is legally responsible for making sure that the pension goes to the right person. This is usually decided by checking your expression of wish form. In some rare circumstances, the pension company may take other factors into account when making a decision about who to give the pension to.

How do I become a beneficiary for a pension?

You become a beneficiary for a pension when someone names you on their nomination form with their pension provider. This form is also sometimes called an expression of wish form and is usually filled in when someone opens a new pension scheme.

Being named as a beneficiary means that you will inherit that person’s pension. You’ll receive any money remaining in their pension pot or any lump sum payable.

Why it’s important to keep your nomination form up to date

It’s important to keep your nomination form up to date if your circumstances or wishes change. That’s because if you don’t update your form, your pension could end up going to the wrong person. For example, if you get divorced but don’t update your expression of wishes form, your pension could still go to your ex-spouse.

What happens if I die without nominating a pension beneficiary?

If you die without nominating a pension beneficiary, then the pension company is responsible for deciding who your pension will go to. It will make enquiries to find out more about your circumstances and then use its discretion to make a decision about your beneficiary.

The pension company will liaise with your family, solicitor and any other relevant people to find out more about you. Sometimes it’s difficult to find out who should be the pension beneficiary or evidence is conflicting. In this case, the pension company can ask for sworn statements or documentary evidence to help make a decision.

What are the pension beneficiary rules?

If you’ve got money left in your pension pot when you die, then your beneficiaries have 2 options. They can choose to take the inheritance as a lump sum or convert the pension into their own name.

If your beneficiaries decide to convert the pension into their own name, they have 2 further options for taking the pension. They can either arrange an annuity or an income drawdown. An annuity is a guaranteed income bought with a pension pot, whereas an income drawdown means that the money stays invested and you draw an income as needed.

If you’re a beneficiary, it’s a good idea to take financial advice on how to take your pension. That’s because how you set up your pension could make a big difference to your income and the amount of tax you pay.

What happens to defined benefit pensions when you die?

Defined benefit pensions pay a retirement income based on your salary and length of time in the pension scheme. They include final salary and average salary schemes. These schemes are more common for employees in public sector jobs than in the private sector.

If you die while you’re paying into a defined benefit scheme, then your beneficiaries may get a lump sum. Some defined benefit schemes also pay a survivor benefit to a nominated person. Check your scheme’s terms and conditions for more information.

What happens to defined contribution pensions when you die?

Defined contribution pensions allow you to build up a pension pot over time. They are also called money purchase schemes and include workplace and personal pensions. Your pension pot can be used to buy an annuity or arrange an income drawdown when you retire.

Defined contribution pensions can be left to a beneficiary if there is still money left in the pension pot when you die. Here are the common scenarios where you can leave money with a defined contribution pension:

  • Existing annuity. If you have bought an annuity, then this may pay out to a survivor, depending on the terms of your agreement.
  • Guaranteed annuity. This is an annuity with a guaranteed payout period. It will carry on paying out after you die.
  • Money left in the pension pot. This is common if you die when you are young or take your pension income as an income drawdown. Your beneficiary should take tax advice to find the most tax efficient way to take their pension.

What happens to a death in service lump sum?

A death in service lump sum is a benefit that many employers offer to their staff. It’s a type of insurance scheme that pays out a lump sum to employees’ loved ones if they die when they’re still on the payroll.

Just like your pension, you can nominate a beneficiary using a nomination form. The money received from a lump sum payment is tax free and is usually based on your annual salary.

Will the beneficiary pay tax?

The beneficiary won’t usually owe inheritance tax on an inherited pension. That’s because it’s excluded from the taxable estate.

If the pension owner died before they turned 75, the beneficiary may have to pay income tax in the following circumstances:

  • The pension was an old type of drawdown fund.
  • They receive the pension more than 2 years after the pension company was told about the death.
  • The pension was worth more than the lifetime allowance, currently £1.073 million.
  • If the pension owner died after age 75, then the beneficiary will usually have to pay income tax on their pension income.

What happens if I die before the age of 75?

If you die before you reach 75, your pension beneficiary won’t normally have to pay any tax.

There are exceptions, such as if the pension is an old type of drawdown fund, they receive the pension more than 2 years after the pension company is informed of the death or your pension has exceeded the lifetime allowance.

What happens if I die after the age of 75?

If the pension owner was over 75 when they died, then you may have to pay income tax on your pension income. Income withdrawn from the pension is usually taxed at the beneficiary’s marginal rate, although they won’t pay any National Insurance.

Tax rules on inherited pensions are complicated, so it’s a good idea for beneficiaries to get financial advice before they make any decisions.

Why it’s important to think about your pension beneficiary

Zoe Stabler

Finder expert Zoe Stabler answers

It’s a little known fact that pensions are one of the most tax-efficient ways to pass on wealth. That’s why it’s important to spend time thinking about your pension beneficiary when you open a pension. It’s also worth checking any older pension schemes to see if you have a nomination form in place and if it still reflects your wishes.

Spending 5 minutes now can save your beneficiaries a lot of hassle in the future. With an up-to-date form, you can relax and know that your pension will go to the right person.

Bottom line

If you’re opening a new pension, then you’ll need to make a decision about your pension beneficiary. Your expression of wishes form will be used to decide who receives any remaining pension when you die.

For most people, it’s a simple choice, but if your circumstances are more complicated, then it may be worth getting some financial advice. Experts also recommend reviewing your will and pension beneficiary every 5 years in case you need to amend them.

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