What happens to my pension if I die?

  • 01 October 2021
  • 10 mins

Back in January 2020 I stood in front of an audience of over a hundred employees, delivering a seminar on financial wellbeing. After the session I was approached by a woman who worked for the company. She broke down into tears. The year before she had tragically lost her husband and was now the sole parent and income earner for her and her daughter.

Although successful within the organisation, she had neglected her own wellbeing and hadn’t reached out for support from her employer, or anyone else. Her fear of reaching out stemmed from not being seen as strong or able to continue to perform well within her role.

Unfortunately this isn’t an uncommon situation.

All of us will experience pain and times of uncertainty throughout our lives without knowing where to turn for support. This is increased through the financial pressures that often present themselves at these times.

Good financial wellbeing is not about having the most money. It’s about empowering people to have an understanding of their finances so that they can make a plan that will support them when the unexpected in life happens.

For many their pension can feel like a mystery pot of money that they will be able to access at some time in the distant future. Pensions can quite often be seen as complex and it’s because of this perception that people can find their pension hard to engage with.

Take a moment to think about your own circumstances and answer these questions:

  • Do you know how much is currently in your current and/or savings account?

  • Do you know how much is currently in your pension?

Usually when I ask these questions in a room full of people, almost 100% say they know roughly how much is in their current account. Often this is because it’s never as much as we would want it to be but secondly because it is usually very easy to access this information.

When it comes to the second question, more people find it difficult to articulate how much money they have saved in their pension. Not only this but the cost of living in retirement is also a complete mystery for the majority of the UK with 63% admitting they don’t know how much money they will need to live comfortably when they retire.

So we’re left in a position whereby many of us don’t know how much we have saved but we also don’t recognise how much we need to save to support us through retirement.

Learn more about Planning for retirement

Despite this uncertainty, pensions are one of the topics that I get asked the most questions about. Here are some of the questions that come up time and time again.

What happens to my pension if I die?

Thinking about death isn’t easy, but it’s important to understand what will happen to your pension when you die, and what the tax implications will be of passing on your pension. It is also important to understand the reverse and what your options are if you lose a loved one and their pension is passed on to you.

How your workplace pension, or one you’ve set up yourself, might be paid to your beneficiaries when you die depends on what type of pension you have.

The “defined contribution” pension is currently one of the most common schemes available within the UK. This type of pension allows you to build up a pot of money to pay you a retirement income based on how much you and/or your employer contribute.

Depending on the age you die, whether or not you have started to access (drawdown) your pension and how you have started to access your pension can all play a part in determining what happens.

What happens if I die before the age of 75?

If you die before you’re 75, anyone who inherits your pension fund won’t pay any tax. This is subject to the money being paid within two years of the date the pension scheme administrator first knew of your death.

It is important to note that if you die before the age of 75, any pension that has not been accessed already will be tested against your lifetime allowance. For the tax year 2021-22, the lifetime allowance is £1,073,100.

What happens if I die after the age of 75?

If you die after 75, anyone who inherits your pension will be taxed on any income received as earnings at their marginal rate of Income Tax.

If your beneficiaries select to take money out through flexible retirement income* then they will only be taxed on any income they take, in the tax year that they take it. There are no lifetime allowance tests carried out if you die after age 75.

*Flexible retirement income, also known as pension drawdown, is a way of taking money out of your pension pot to live on in retirement. It can give you more flexibility over how and when you receive your pension. You can take up to 25% of the pot as a tax-free lump sum.

The time to plan is now.

If you want to understand or find out more have some great free resources that you can access. It might also be worth speaking to a financial adviser to discuss your personal circumstances and to see if they may be able to support you with your future financial planning.

Financial advice could help to provide peace of mind that you are addressing some of the needs of you and your family. Good financial planning is not just about solving problems. It’s about working together with your adviser to help identify objectives and life goals and then create a plan for your finances to help you aim to achieve them.

At Schroders Personal Wealth, we can provide professional support and advice however there are also other firms out there too so it’s important that you find the right fit for you and your circumstances.

Some financial advisers offer a complimentary financial health check which is an opportunity for them to understand your personal situation and whether or not financial advice is right for you after which fees and charges may apply.

Use our free online tool to see if you could benefit from a financial plan.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

A bit about me

My name is Leigh Dunkley and I am the Financial Wellbeing Lead at Schroders Personal Wealth (SPW). I have worked in financial services for the last 7 years, starting my career as a Corporate Banker with Lloyds Banking Group followed by spending 5 years at Scottish Widows where I worked with companies of all sizes to review their workplace pension schemes and strengthen the support they provided to employees.

It was during this time that I realised my passion for financial wellbeing and started on my journey to deepen my knowledge of personal financial planning and the importance of being able to provide education, guidance and advice in the workplace.

Fast forward to October 2019 when I joined the team at SPW. Since then I have dedicated myself to improving the financial wellbeing of individuals across the UK. Through my work with HR and wellbeing teams I help to build and/or enhance firms financial wellbeing strategies, aiming to truly engage and support their employees in creating a financial plan.

I passionately believe that financial institutions, governments and charities need to work hand in hand to support individuals and help them to engage effectively with their finances. Establishing an understanding of wellbeing and demystifying the subject of finances is the start of this process.

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