What happens to your pension when you die?

You’ve spent all your working life building up a pension, making contributions and working on your investment strategy so you can look forward to a comfortable retirement. Ideally, you’ll have enough to last throughout your golden years, but what happens if there’s some left over? It may not be nice to think about but it’s an important part of financial planning, so here’s everything you need to know about what happens to your pension when you die. 

Does a pension stop when you die?

Not necessarily. It depends on the type of pension you have, but in a lot of cases it’s possible that your pension can continue to be paid to your chosen beneficiary – perhaps your husband, wife or children – albeit in a slightly different form. It can also vary depending on your age when you die and how your beneficiaries want to be paid, with some pensions continuing to pay out pre-agreed amounts and others offering any remaining savings as a lump sum.

Crucially, pensions are classed as sitting outside your estate for inheritance tax purposes, which means your beneficiaries won’t need to pay any additional inheritance tax when they access your savings.

What happens to your private pension when you die?

If you’ve paid into a workplace pension or have set up your own (for example a self-invested personal pension/SIPP if you’re self-employed), you’ll have a private pension. What happens to it when you die will depend on whether you’ve got a defined contribution scheme – which is standard for most workplace pensions and SIPPs – or a defined benefit scheme.

Defined contribution pension

A defined contribution pension scheme pools your contributions over the years into a retirement pot, which you can then decide how to turn into an income. What happens to it when you die will depend on your age and whether you’ve opted for an annuity or drawdown.  

Annuity

Typically speaking, if you’ve turned your private pension into an annuity and have already started receiving an income from it, payments will stop and you won’t be able to pass any funds on. However, there are some exceptions to this, one of which is if you chose to include a guaranteed period when you took out your annuity. This is because annuities with a guaranteed period will always be paid for that timeframe, so if you set up a guaranteed period of 10 years and died after six, your beneficiaries would receive the income for the remaining four years.

Similarly, if you chose a joint life annuity or your plan provides for a dependent or nominee, the beneficiary would continue to receive the income after you died, though likely a reduced amount. This is what’s known as a dependant’s annuity. These payments will continue for the rest of the beneficiary’s life and would be tax-free if you died before the age of 75, though if you died aged 75 or over the payments would be taxable at the beneficiary’s nominal income tax rate. 

Drawdown

If you’ve chosen to access your pension pot via drawdown, you’ll be able to pass on the remaining funds to your beneficiaries. Or if you’ve yet to access your fund, you can pass on the full pot. Either way, your beneficiaries can choose to keep it in drawdown, take it as a lump sum or buy an annuity.

If you’re under 75 when you die, your beneficiaries will receive the income from your pension pot entirely tax-free – provided it’s under the lump sum and death benefit allowance (LSDBA) of £1,073,100 – whereas if you’re 75 or over, any payments will be classed as income and taxed at their marginal rate.  

Defined benefit pension

If you’ve got a final salary pension and had already started receiving benefits, your beneficiaries will normally be able to receive a “dependant’s pension” that will be a percentage of the payment you received, taxed at their marginal rate.

Alternatively, if you were to die before you retired and had yet to receive any pension income, your beneficiaries could be eligible for a lump sum worth a multiple of your salary (this would be tax-free if you were younger than 75). Either way, the precise outcome will vary depending on your particular scheme, so make sure to check the scheme’s rules with the administrator.

Note that who counts as a dependent or beneficiary can often be stricter for defined benefit pensions, and will normally be limited to legal spouses or civil partners and won’t include children, unless they’re financially dependent and still in full-time education.

What happens to your state pension when you die?

Although your state pension payments will technically come to an end when you die, your spouse or civil partner will normally be able to benefit from an additional payment, provided they’re also over state pension age. However, the payment that your husband, wife or civil partner receives will depend on when you reached state pension age.

If you reached state pension age before 6 April 2016 – and therefore received the Basic State Pension – your partner will be able to claim your Additional State Pension on top of their own. This is provided they didn’t remarry before they also reached state pension age.

Alternatively, if you reached state pension age on or after 6 April 2016, you’ll have been in receipt of the New State Pension and your husband, wife or civil partner will be able to inherit part of your protected payment, if one applies. Speak to the Pension Service to see what the options may be.

If you’re unmarried or not in a civil partnership when you die, your state pension payments will cease and there won’t be anything for your beneficiaries to inherit. Benefits can’t be passed onto children or anyone else you nominate – only your husband, wife or civil partner will qualify. 

How do you stop a person’s pension after their death?

You’ll need to contact the relevant organisations to notify them of the death. In terms of the state pension, you’ll need to inform the Pension Service – you can do this via the Government’s Tell Us Once service – while for private pensions you’ll need to contact the relevant pension provider. In either case, ask what you need to do next in terms of inheriting the pension or claiming additional benefits, and it may be worth speaking with an independent adviser as well.