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In this short video, we’re talking about what happens to your pension if you die before retirement. If you’re invested in a personal retirement savings account, a pan-European personal pension product or a personal retirement bond then the full value of those pension products will be transferred to your estate and distributed to your beneficiaries in accordance with your will. This treatment can also apply to company pensions, but only where you’ve left the company and have a preserved benefit within the old company’s scheme.

If you’re an active member of a company scheme and you die whilst employed by that company, then the rules are different. The maximum lump sum that can be received by your estate from a company scheme or schemes is four times your final salary at the date of death. Your employee contributions can also be refunded, with or without their capital appreciation, in addition to the lump sum received. Any remaining balance within the scheme can be either a) used to purchase an annuity or b) transferred to an approved retirement fund for the benefit of a spouse or dependent. Every company scheme is different, so make sure you read the terms and conditions!

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What Happens To Your Pension If You Die Before Retirement?

Planning for retirement is essential to ensure financial security during the later years of life. One vital component of retirement planning is understanding what happens to your pension if you were to pass away before reaching retirement age. While contemplating death is not a pleasant thought, being aware of these eventualities can provide reassurance for individuals and their loved ones.

The fate of your pension largely depends on the type of pension scheme you are enrolled in. In this article, we will discuss common scenarios for various pension schemes, highlighting what happens if you were to die before retirement.

1. Defined Contribution (DC) Schemes:
In a DC scheme, the value of your pension is dependent on contributions made by you and your employer, as well as investment performance. If you die before retirement, the following typically happens:

a) Lump-Sum Payment: If you have not yet accessed your pension savings, the fund’s value will be paid out as a lump sum to your beneficiaries, generally free from inheritance tax if you pass away before the age of 75. However, note that this may be subject to income tax if you die after the age of 75.

b) Dependent’s Drawdown: If you have already started taking income from your pension and named a dependent to receive your pension pot upon your death, they may continue to receive payments. However, these payments will be subject to income tax.

2. Defined Benefit (DB) Schemes:
DB schemes promise a specific income during retirement, usually based on your salary and length of service. If you die before retirement:

a) Spouse or Dependants’ Pension: Most DB schemes offer survivor benefits, typically through a spouse’s or dependents’ pension. Your spouse or certified dependents will generally receive a percentage of your pension’s value as a regular income after your death.

b) Lump-Sum Payment: Some DB schemes may offer a lump-sum payment to your beneficiaries instead of an ongoing income. The amount paid will usually depend on the scheme rules and your pension’s value at the time of your death.

3. State Pensions:
The UK state pension system also has provisions for what happens if you die before reaching state pension age:

a) Incomplete Qualification: If you have not accumulated enough qualifying years to receive the full state pension, your partner may be eligible for additional state pension based on your national insurance record.

b) Additional State Pension: If you have accrued entitlement to additional state pension, your spouse or civil partner may be eligible for some or all of it upon your death, depending on various factors.

These are general guidelines, and it is crucial to review your specific pension scheme or consult a financial advisor to fully understand the conditions surrounding your particular pension arrangement.

To ensure your pension benefits are distributed according to your wishes, consider the following actions:

1. Keep Beneficiary Designations Up to Date: Regularly review and update your pension beneficiary designations to ensure they reflect your current circumstances and wishes.

2. Understand Nomination Forms: Familiarize yourself with the nomination forms for your pension scheme. These allow you to specify who should receive your pension benefits upon your death.

3. Discuss with Loved Ones: Discuss your pension arrangements with your loved ones, ensuring they are aware of any potential benefits they may receive in the event of your death.

While discussing death and its implications on your pension may seem unpleasant, proactively addressing these matters can provide peace of mind. Understand your pension scheme’s rules, keep your beneficiaries informed, and consult professionals when necessary to ensure that your pension benefits are handled as per your wishes.