Passing on Your Pension

One of the most common questions our clients ask us is, “What happens to my pension when I die?“.

We get it. You’d like to provide for your loved ones even after you’ve gone. It’s only natural. And your pension, which may well be one of your most valuable assets, could hold the potential to provide that all-important ongoing support.

But what your beneficiaries will receive, and the flexibility with which they can access their inheritance, depends on the choices you make now.

At My Pension Expert, we consider what you hope to pass on to your loved ones when making our recommendations, providing information and advice to help you keep looking out for them, even after you’ve gone.

So, read on to find out how you can pass on your drawdown or annuity, as well as the impact of turning 75 on the tax position of your beneficiaries.

What happens to passing on your pension drawdown when you’ve gone?

When it comes to passing on your pension, one of the most significant advantages of a drawdown pension is the flexibility and potential tax benefits it offers to your beneficiaries.

If you pass away while still having funds in your drawdown account, you can pass on your remaining pension pot to your loved ones in a tax-efficient way, ensuring that your hard-earned savings continue to benefit your family even after you’re gone.

One of the primary advantages of passing on your pension through drawdown is that your beneficiaries can receive the remaining funds as a lump sum. This provides them with immediate access to the money, allowing them to use it as they see fit.

Another option available to your beneficiaries is the ability to convert the pension pot into an annuity. An annuity provides a regular income for the recipient, offering a steady stream of financial security for their retirement. This option can be particularly beneficial if your beneficiaries are looking for guaranteed income over the long term.

Whether they choose to take the funds as a lump sum or convert the pension into an annuity, the options available ensure that your loved ones can benefit from you passing on your pension in a way that suits their financial needs. The tax-free or tax-efficient nature of passing on your pension further enhances the legacy you leave behind, allowing you to pass on your wealth to your family in the most advantageous way possible.

With My Pension Experts support you can be confident that your pension will serve your financial goals today and continue to benefit your family long after you’re gone. Seek tailored advice and guidance, contact us today for a no-obligation consultation.

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Passing on a lifetime annuity

By default, when you pass away, income from a lifetime annuity will stop. This is because your pension pot has been used to purchase a guaranteed income for your lifetime, and once you’re no longer here, the annuity payments generally cease.

However, many annuity providers offer a range of extras that you can add to your plan when you set it up – these are known as death benefits.

These additional features can provide a level of financial protection for your beneficiaries and give you clarity that they are continually supported. We are here to guide you in passing on your pension to those closest to you.

Types of death benefits

Value Protection

With value protection, you can pass on the annuity purchase amount, minus any income you’ve already taken, to your estate.

For example, say you purchase a lifetime annuity with £100,000, take £5,000 annual income, and pass away after receiving two payments.

The remaining £90,000 (minus any fees) would be paid to your beneficiaries.

Joint-Life Cover

With a joint-life policy, both you and your partner receive income from the plan. If one of you passes away, the surviving partner will continue to receive either full or partial payments for the rest of their life.

You can choose how much the surviving partner receives when you purchase your annuity.

Your provider will consider your partner’s health and lifestyle, as well as the size of their payments as a survivor, when calculating your annuity rate.

Guarantee Periods

A guarantee period makes sure that your income will be paid for at least that long, even in the event of your death.

You can typically choose a guarantee period of between 1 and 30 years.

So, in the event of your death, any remaining payments within your chosen guarantee period are paid to your estate either as a lump sum or regular payment.

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Is drawdown better than an annuity?

When it comes to passing on your pension, it’s important to note that your choice of death benefits will impact your annuity rate. Adding options like a guaranteed period, joint-life annuity, or inflation protection can reduce the amount of income you receive, as these benefits increase the potential pay-out to your beneficiaries.

Your annuity will typically sit outside of your estate for inheritance purposes, but this isn’t always true for those passed on under a guarantee period. However, whether or not a beneficiary will need to pay income tax on any funds received depends on your age when you pass away.

Passing on a fixed-term annuity

Passing on your pension as a fixed-term annuity means the pension is passed on in the same way as a lifetime annuity – you’ll typically need to include death benefits in your plan to determine how much of your pension your beneficiaries will receive and how they’ll receive it.

However, at My Pension Expert, we normally recommend value protection as standard when it comes to a fixed-term annuity. This guarantees that, should the worst happen, your chosen beneficiaries will receive at least the value of your purchase amount minus any fees and income already taken. Depending on your specific policy, it may be more.

Of course, your advisor will explain the specific details of your recommended policy to you if a fixed-term annuity is identified as the best option for your circumstances, and can tailor it as necessary to suit your needs.

Age Matters: Tax Implications

Your pension typically sits outside of your estate, meaning your beneficiaries won’t usually have to worry about inheritance tax.

However, when it comes to passing on your pension, the age at which you die is important in determining what tax your beneficiaries will pay on your pension. And the milestone that makes all the difference? Turning 75.

So, how will turning 75 affect your beneficiaries tax position?

What happens to your pension if you die before age 75?

If you pass away before the age of 75, your beneficiaries usually receive any income or lump sum payments tax-free.

This is on the condition that the money is withdrawn as a lump sum or transferred into the beneficiary’s name within two years of the earlier of:

The date the provider first knew of your death or;
The date the provider could reasonably have been expected to know of your death.

What happens to your pension if you die after turning 75?

If you pass away after turning 75, your beneficiaries will be taxed at their marginal rate of income tax (although they won’t need to pay National Insurance contributions).

It’s worth noting, however, that they’ll only be taxed on the income they take within each tax year.

If you have any questions or concerns regarding passing on your pension and its tax implications for your beneficiaries, don’t worry! Our independent financial advisers cover this as part of their advice.

Choosing your beneficiaries

When you have made some decisions about passing on your pension, it’s important to inform your pension provider of your chosen beneficiaries. Although not legally binding, your wishes must be considered by the pension’s trustees. Our independent financial advisors can help guide you through this process.

They can explain complex decisions and ensure you understand the impact on your legacy. We recommend you regularly review and update your beneficiaries as your circumstances change.

With expert advice, you can make informed choices that align with your long-term goals. Let us help you secure your future and protect what matters most.

Frequently Asked Questions

Need another question answering? Get in touch with us today.

How do I nominate a beneficiary?

You can nominate a beneficiary by filling out a “nomination of beneficiary” form (sometimes called an “expression of wish” form) with your pension provider.

You can usually do this online or by requesting a paper form.
You’ll need to give the name, relationship, and contact details of the person or people you want to leave your pension to.

This tells the pension provider who you’d like to receive the money when you die. It’s not legally binding, but it’s usually followed unless there’s a good reason not to.

Can I change my beneficiaries?

Yes, you can change your beneficiaries at any time.

Just contact your pension provider and submit a new form.
It’s a good idea to review your nomination after big life changes, like marriage, divorce, or having children.

Keeping this up to date helps make sure your wishes are clear and more likely to be followed.

What happens if I don’t pass my pension to anyone?

If you haven’t nominated anyone:

The pension provider or scheme trustees will decide who gets the money.
They’ll usually try to pay it to your spouse, children, or other close dependents.
But without clear guidance, it could cause delays or disputes, and your money might not go to who you’d have chosen.

Making a nomination avoids confusion and makes the process much smoother for your loved ones.

Can I leave my pension to a charity?

Yes, you can nominate a charity to receive some or all of your pension.

You’ll need to include the charity’s full name and registered charity number on the nomination form.
It’s wise to let your pension provider know it’s a charity to avoid confusion.

This is a great option if you want your pension to support a cause you care about after you’re gone.

Advice on passing on your pension

As you may have gathered, the possibilities for passing on your pension and the tax implications for each can vary greatly from person to person; they’re very much dependent on your individual circumstances and pension product that you choose. Not to mention, the rules are subject to change in future.

Getting advice from an independent financial adviser can help you understand the impact of your choices when it comes to passing on your pension. Their recommendation can help you to find the solution that best suits your needs and objectives, both now and in the future.

Give us a call today to discuss your options and secure your legacy.