Pensions and death.
Are they cheery topics to talk about? No.
Are they important to talk about? Absolutely.
When most people (finally) get around to proper estate planning, they prioritise the big things, such as:
- The family home
- Savings, investments and other sums of money
- Possessions of high (and sentimental) value
And rightly so. Ensuring that your family get what you want them to is important, and measures must be put in place for this to happen. But, what about your pension? Does it simply disappear when you die?
The answer to this isn’t a simple yes or no, which makes it important to understand your options, and make the best decision for you and your family.
State Pension
This one is a relatively simple one, so it should be mentioned first.
When you die, your State Pension payments stop. If you have a surviving spouse, they may be entitled to extra payments, based on the following factors:
- The amount of National Insurance Contributions (NICs) that you have made
- The age you and your spouse reached the State Pension Age
In the event of a death, the State Pension doesn’t simply sort itself out; the Pension Service should be informed by calling 0800 731 7898.
Defined Benefit pensions
A Defined Benefit pension (also known as a Final Salary pension) generally offers a range of death benefits. These schemes are linked to your salary, and the amount of time you have worked at a company. When you die, it will usually carry on paying a pension to your spouse, but at a reduced rate. Some schemes even pay extra for any children under 18.
Defined Contribution Pensions
Exactly what is available, how it is paid, and the tax treatment, depends on your age at death and also whether you have withdrawn (also known as crystallised) your pension.
If you die before age 75 with an uncrystallised pension, your beneficiary can:
- Take a tax-free lump sum up to the limit of the member’s Lifetime Allowance (currently £1 million) with any remainder subject to tax. This option is only available if the lump sum is taken within two years of the member’s death, any later and the whole lump sum is taxable
- Buy an Annuity with the pension pot, the income from which would be paid tax-free
- Take a tax-free income using Flexi-Access Drawdown (FAD)
If you die after age 75 with an uncrystallised pension, your beneficiary can:
- Take a lump sum, which is added to the beneficiary’s income and taxed at their marginal rate (20%, 40% or 45%)
- Take an income using Flexi-Access Drawdown (FAD) which will be taxed at the beneficiary’s marginal rate
- Buy an Annuity, which is again added to the beneficiary’s income and taxed at their marginal rate
If you die before age 75 with a crystallised pension, your beneficiary can:
- Elect to take a tax-free lump sum within two years of the member’s death (if it’s after two years, tax will be payable at the beneficiaries marginal rate)
- Buy an Annuity with the pension pot, the income from which would be paid tax-free
- Take a tax-free income using Flexi-Access Drawdown (FAD)
If you die after age 75 with a crystallised pension, your beneficiary can:
- Take a lump sum, which is added to the beneficiary’s income and taxed at their marginal rate (20%, 40% or 45%)
- Buy an Annuity, which is again added to the beneficiary’s income and taxed at their marginal rate
- Take an income using Flexi-Access Drawdown (FAD) which will be taxed at the beneficiary’s marginal rate
What if I haven’t accessed my pension yet?
If you die before the age of 55, or before you access your pension, the options available depend on the provider, the type of pension and the terms you initially agreed on.
What to do after a death
Dealing with someone’s affairs when they die can be an extremely difficult time. Not only are the family still grieving, but they find themselves surrounded by paperwork and complex terminology that they often don’t understand.
Pensions can be the most complicated part, as they are often split up between various providers from different periods of time and places of work. The first thing to do is check paperwork for evidence of any personal or workplace pensions. The providers can then be contacted, and will give you an idea of:
- How much the pension is worth
- What measures were put in place (such as death benefits)
- What you have to do next
How can I make things easier?
The most commonly encountered problems stem from when pension providers aren’t told who the beneficiaries are.
Getting your affairs in order doesn’t stop after you’ve arranged your Will, or assigned a lasting power of attorney. Giving your pension the care and attention it needs will prevent things being harder than they need to be in the event of your death.
For more information about pensions, don’t hesitate to contact us using the phone number at the top of the page.