If you’re thinking about the future, planning your final wishes, and want to make sure your loved ones are taken care of, looking into what happens to your pension when you die can help. Depending on which pension scheme you’re a part of, and which options you opted into, it could provide some financial help for a family member when you pass away. We’ll take you through some of the different options below.
What happens to a state pension when someone dies?
When someone dies their state pension will stop being paid. But there are some instances where the person’s spouse or civil partner can inherit some of the pension. To make a claim for this you need to have reached state pension age. But what you get and how you claim will depend on whether you reached state pension age before or after 6 April 2016.
If you reached state pension age before 6 April 2016:
- Any extra you receive as part of your own state pension will depend on your spouse’s or civil partner’s National Insurance Contributions.
- You won’t be able to claim this if you get re-married or have a new civil partner before you reach state pension age.
If you reached state pension age on or after 6 April 2016:
- You can claim the “new state pension” plus you might be able to receive an extra payment on top of this.
- You won’t be able to claim this if you get re-married or have a new civil partner before you reach state pension age.
The rules about who gets your pension when you die can be complex. You can find out more about the rules on inheriting a pension on the government website. You can also learn more about your eligibility to inherit your spouse’s or civil partner’s pension with this online tool. It’ll help you understand if you’re eligible to inherit some of your spouse’s state pension and how much you’re likely to be entitled to.
What happens to a private pension when someone dies?
What happens to a private pension after you die depends on the type of pension you’ve got. The people you’ve chosen to receive your pension in the event of your death – known as your beneficiaries – can get the money in different ways depending on the type of pension. Let’s figure out which one applies to you.
Defined contribution pensions
Do you have a defined contribution pension?
This type of pension allows you to build up a pot of money over time that you can use as income when you retire. The amount you get is based on the amount of money you and your employer put into the pot. The contributions can also be put into investments by your pension provider, so the total amount will go up or down depending on how well the investments perform.
What happens to defined contribution pension when you die?
If you still have money in your pension pot when you die, then your beneficiaries could take it out in several different ways. Here’s how each option works:
If nothing has been taken from the pension when you die
Your beneficiaries could:
- Get it in a lump sum
- Set up a guaranteed income
- Or set up a flexible retirement income
If you already started to receive a flexible retirement income when you die
Your beneficiaries could:
- Get it in a lump sum
- Set up a guaranteed income
- Or set up a flexible retirement income
But with both of the above options, it’s worth keeping in mind that a flexible retirement income isn’t always possible. This depends on the death benefits that were offered when the pension was first set up.
If you chose a guaranteed income
What your beneficiaries get will depend on how the pension was set up and which options you chose. For example, if you chose to have the guaranteed income on a joint life basis then the beneficiary you chose would still receive a percentage of your guaranteed income after you die. But if you chose the single life option then these payments would stop when you die. There are also options to include value protection as part of your pension scheme so if this was the case then your beneficiary could also be entitled to a lump sum.
Defined benefit pensions
Do you have a defined benefit pension?
This type of pension gives you an income when you retire that’s based on your salary and how long you worked for the employer. This type of pension is sometimes known as a final salary scheme. They’re not as common as defined contribution pension schemes but still appear in the public sector.
What happens to defined benefit pension when you die?
With a defined benefit pension any money your beneficiaries get will depend on the rules of the scheme. This can vary depending on the provider. So it’s important to check what your beneficiaries could get if you were to pass away.
Defined benefit pension schemes usually have stricter rules about who your beneficiaries can be. But this can typically be your spouse or civil partner, your children, or anyone else who was financially dependent on you, such as a partner you live with but aren’t married to or in a civil partnership with. The money they get when you die is usually a percentage of the pension you would’ve got. This will be taxed the same as regular income. Sometimes when the pension is fairly small, your beneficiary may be able to get it as a lump sum instead. There are also other instances where beneficiaries might get a lump sum payment.
Some examples of different types of lump sum
- Refund of contributions – usually if the person dies before they draw anything from their pension
- Death-in-service lump sum – often a percentage of your salary offered if you die when you’re still paying into the scheme
- Pension protection – usually paid if you die within a guarantee period
What about tax on your pension after death?
The rules around tax on your pension after death are complex and depend on a number of factors, such as which type of pension you have, how the beneficiaries receive the money (e.g. lump sum), and how old you are when you die. To explore all the different scenarios the government guidance can help. It shows you when exactly tax will need to be paid on your pension after death.
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