Who gets my pension after I die?
Please note: This article refers to the rules for Personal Pensions and Self-Invested Personal Pensions (SIPPs). For private pensions, please contact your pension provider.
Being a tax-efficient vehicle for savings, pensions fall outside the estate when the account holder passes away. This means that there is no inheritance tax due on the amount. Given this, a pension can help manage your inheritance tax liability. General Investment Accounts and ISAs are subject to Inheritance Tax unless they hold particular stocks that qualify for exemption.
However, this does not mean your beneficiaries will receive your pension tax-free.
Who can be a beneficiary of my pension after I die?
We are often asked who can benefit from my pension after I die. Since pensions do not make up part of one’s estate, they are not included in a Will. This means that anyone can be nominated to be a beneficiary. Generally, this is done by completing a nomination form with your pension provider. If you are unsure whether you currently have a nominee, contact us if we manage your pension or with your pension provider directly.
What are the tax rules for my pension?
How your pension is taxed after you die depends on two factors:
- Whether you die before or after 75
- How your chosen beneficiary or beneficiaries decide to withdraw the benefits
Should you die before age 75, your beneficiaries can take benefits as they wish, and no tax will be due.
What happens to your pension when you die over 75
HMRC pension rules confirm that once you reach age 75, your beneficiaries will be taxed after you pass away, and they will start taking benefits from your pension. This will be taxed as income at the beneficiary’s marginal tax rate.
The HMRC rules on tax on death benefits are complicated, and we recommend you speak to a qualified advisor. How your beneficiaries take the benefits can impact the tax they might pay.
How can my beneficiaries benefit from my pension?
There are generally two options that your nominated beneficiaries can choose from:
- Withdraw the entire pension as a lump sum
- Continue with flexi-access drawdown
Continuing with Flexi-Access Drawdown is only possible with some providers, so it is best to check to make sure.
Any benefits taken, no matter how, will be taxed as income at the beneficiary’s marginal tax rate. For example, if you leave behind a £300,000 pension pot and your beneficiary decides to take it all as a lump sum, they will likely pay 45% tax on most of the pension payment.
In this case, the best option would be for the beneficiary to draw slowly from the pot using Flexi-Access Drawdown. Your beneficiary can then manage how much they take each year and ensure they do not pay excessive tax while leaving the pension pot invested.
Summary
Using a pension for estate planning can be very useful, so you must keep your nominated beneficiaries updated and ensure they know their options after you die. If you are unsure whether your provider offers Flexi-Access Drawdown as a death benefit on your pension, you should check with them or contact us if we are managing your pension. Since the inheritance tax is 40%, the last thing you would want is for your beneficiary to pay 45% income tax on your hard-earned life savings after you pass away.
