New pension rules were introduced in 2015, governing everything from how you access your pension to what can happen to your pension after you die.
Pensions are typically held outside of your estate, which means that should you die before fully accessing your pension, your beneficiaries can normally access your retirement savings without having to include them within any inheritance tax calculations.
The type of pension you have will determine how much your beneficiaries can claim and when they can claim it in the event of your death.
Defined Contribution Pensions
Your beneficiaries can usually access whatever is left in your pension via drawdown payments, a lump sum or buying an annuity. They will have two years to claim a death pension, after which point tax may be charged.
Generally, if you die before your 75th birthday your pension benefits can be received by your chosen beneficiaries tax-free. If you are 75 or older, they'll pay income tax on what they receive.
It’s also important to check that your plan allows the full use of options as some older plans may not, meaning your beneficiaries could find that the only option available to them is annuity purchase or to take a lump sum (which may not be the most tax efficient option).
There may also be tax implications for your beneficiaries if the amount you leave behind in your pension, when added to the amount of pension accessed before death, exceeds the Lifetime Allowance (currently £1,073,000).
Defined Benefit Pensions
Defined benefit schemes usually offer lump sum death benefits and scheme pension.
The lump sum death benefit will usually be a set amount or a multiple of salary. Lump sum death benefits are tax-free if the member dies under age 75, the lump sum is within the member’s lifetime allowance and it is paid within two years of the scheme administrator becoming aware of death. Lump sum death benefits are usually only payable on death before retirement.
A scheme pension is usually based on a reduced percentage of the member’s pension entitlement, for example 50%.
On death of the member the scheme pension can only be paid to a ‘dependent’ which means a spouse or civil partner, your child aged under 23 (or older but dependent due to a disability), any of your financial dependents or anyone mutually dependent on you.
The scheme pension is taxable as income regardless of the member's age when they die.
You should check the scheme rules so that you are aware of the death benefits available under your own scheme.
If purchased, annuity death benefits can include guaranteed periods, joint life/nominee annuities and value protection. Paid tax free if the original annuitant was under 75 when they died or taxed at the marginal rate of the recipient if the annuitant was 75 or over when they died.
If death benefits haven’t been purchased by the annuitant at outset, then nothing is payable when they die.
It’s possible to pass on your State Pension payments after death but this can only go to your spouse or civil partner. The main pension rule governing State Pensions in death is whether you reached State Pension age before or after recent State Pension changes came into effect on 6 April 2016. Your spouse or civil partner will need to be over State Pension age to claim extra payments from your State Pension.
If you reached State Pension age before 6 April 2016 and receive the Basic State Pension, your spouse or civil partner may be entitled to some basic State Pension, which is based on your National Insurance Contribution (NIC) record.
However, this is only applicable if they haven’t built up a full basic state pension in their own right and will only be of benefit if your NIC record is more complete than theirs. Your spouse or civil partner will not get any basic State Pension if they remarry or form a new civil partnership before they reach State Pension age. In some instances, it may be possible to pass on a State Pension lump sum on death and your spouse or civil partner could qualify for bereavement benefits.
If you contributed towards an additional state pension, such as the state second pension or the graduated state pension, your spouse or civil partner may be able to inherit some of this additional state pension if you die.
If you reached State Pension age after 6 April 2016 and (will) receive the new State Pension, your spouse or civil partner may be able to inherit an extra payment on top of their own State Pension entitlement.
You should contact the Pension Service to get information about your State Pension.
Points to Consider
It is important that you check the scheme or plan rules so that you are aware of the death benefit options for your beneficiaries.
It's also crucial that nomination/expression of wish forms are kept up to date and fully reflect your wishes. A death benefit nomination helps to guide the scheme trustees/administrators when exercising their discretion and they will rely on the most recent nomination form they have received. Nomination forms can normally be changed at any time, to reflect changing circumstances.
In respect of defined contribution pensions, the new rules around who can inherit make it even more important that nomination forms are correctly completed. If you want someone other than a dependent to inherit and would like them to have the option of inherited drawdown, you must name them on the nomination form – a lump sum can, however, be paid at the trustees’ discretion to a non-dependent even if there is a surviving dependent.
Speak to a member of Nockolds Wealth if you need assistance or to find out more.
- This article is for your general information only, and is not intended to address your particular requirements. The content should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice.
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