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What happens to my pension when I die?
Find out what happens to your pension when you die and how it works.
Your death probably isn’t what you want to be thinking about – but we do spend our whole lives paying into a pension pot so it’s natural to wonder what happens to that money if we kick the bucket before we get the chance to spend it. The good news is that there are ways you can leave it to your partner or children. Find out whether you’ll be able to leave your pension for your loved ones and how much tax they’ll need to pay.
To get the most out of this article you may need to know what type of pension you’ve got. Log in to the online portal for your chosen provider to find out.
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Defined contribution pensions
This could be your workplace pension or any private pensions like SIPPs that you have.
If you haven’t started drawing from your pension
You can pass this to your beneficiaries tax-free if you died before you turned 75, either as a lump sum, invested in a drawdown or to purchase an annuity.
If you’ve started to draw from your pension
This will depend on how you’ve chosen to withdraw your pension.
- If you’ve withdrawn a lump sum. The withdrawn cash will be counted as part of your estate and they can inherit it this way.
- If you’ve chosen a pension drawdown. Your beneficiaries can access what’s left via drawdown payments, a lump sum or by buying an annuity. This is tax free if you died before turning 75.
- If you’ve purchased an annuity. Things get a little complicated here. Some annuities can be left behind but others can’t. Consider this before you buy an annuity.
Defined benefit pensions
The value of a defined benefit pension is linked to your salary and time spent working for your employer.
If you die before retirement
Your pension provider will pay out a lump sum that’s worth 2-4 times your salary. If this is before you turn 75 then it will be tax free for your beneficiaries.
Your spouse, partner or child may also receive a “survivors pension”. They’ll need to pay income tax on this.
If you die after retirement
Your pension provider may continue to pay a reduced amount to your spouse, partner or another dependent. Check with your provider on this.
Is my pension part of my estate?
Your estate is everything you own, your house, your car, your cat, money in your purse, the pure itself, the collection of hotel toiletries that are “too good to use”, all of it.
Except for your pension. Your pension is considered to be separate from your estate. When you withdraw a lump sum from your pension, that money moves into your estate, which is why, as you see below, your beneficiaries may have to pay inheritance tax on it.
Cash withdrawn from your pension pot
If you withdraw from your pension pot before you pass away then it becomes part of your “estate”, which is everything you own – it doesn’t matter that it was withdrawn from your pension, even if this can be proved.
Pensions that can be left behind
You can sometimes leave your pension to your loved ones after your own death with an annuity or adjustable income. We’ve written in some more detail about what annuities are and how they work, but here’s a summary:
- Joint annuity. This is when you take an annuity with another person. After you have died, the payments can continue to your beneficiary. Once they die, it ends.
- Guaranteed period annuity. If you take a guaranteed period annuity and die before the end of it, payments will continue even if you die before it ends until the guaranteed period is over.
- Capital protected annuity. >This is a lump sum of anything that remains in your pension pot after your death.
- Adjustable income. With this type of drawdown you can choose who receives the money left in your pension pot after your death.
Do my beneficiaries pay tax when they receive my pension?
When your loved ones receive an inheritance from your pension, they may have to pay tax on what they recieve, but it depends on the circumstances and the age you are when you die.
We’ve outlined some circumstances below and how much your beneficiary will have to pay. Generally, if you die before your 75th birthday, they’ll pay less, if at all.
If you die before you turn 75
| Inheritance | Tax they’ll have to pay | Notes |
|---|---|---|
| Cash – unused but withdrawn from your pension pot | Inheritance tax | This is based on the size of your estate |
| Money that’s still in your pension pot | Nothing | Only if taken within 2 years |
| Adjustable income | Nothing | |
| Joint, guaranteed period or capital protected annuity | Nothing |
If you die after turning 75
| Inheritance | Tax they’ll have to pay | Notes |
|---|---|---|
| Cash – unused but withdrawn from your pension pot | Inheritance tax | This is based on the size of your estate |
| Money that’s still in your pension pot | Income tax | |
| Adjustable income | Income tax | |
| Joint, guaranteed period or capital protected annuity | Income tax |
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All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
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