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 speak to your pension provider.
Being a tax-efficient vehicle for savings, pensions fall outside of 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 be a very useful tool for managing 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 that your beneficiaries will receive your pension tax-free.
Who can be a beneficiary from 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 one’s estate, they are not included on 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, get in touch with 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 there will be no tax 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 start taking benefits from your pension. This will be taxed as income at the beneficiary’s marginal rate of tax.
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 have an impact on the amount of tax they might pay.
How can my beneficiaries take benefits 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
Please note that the option of 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 rate of tax. This means that, 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 be paying 45% tax on most of the pension payment.
In this case, the best option would be for the beneficiary to slowly draw from the pot using Flexi-Access Drawdown. Your beneficiary can then manage how much they take each year and ensure they do not pay excess levels of tax, whilst leaving the pension pot invested.
Using a pension for estate planning can be very useful, so it is important that you keep your nominated beneficiaries up to date and ensure they are aware of their options after you die. If you are unsure whether your provider offers Flexi-Access Drawdown as a death benefit on your pension, you are best to check with them or get in touch with us if we are managing your pension for you. Since Inheritance Tax is 40%, the last thing you would want is your beneficiary paying 45% income tax on your hard earned life savings after you pass away.