If you’re part of a workplace pension scheme or have set up your own pension, such as a SIPP (which is a Self Invested Personal Pension) or a self employed pension, you’ll have what’s known as a private pension.

There are two main types, defined contribution pensions and defined benefit pensions. The type you have will determine how much of your pension your beneficiaries can claim when you die.

In this video I discuss the rules around defined contribution pensions and the impact of being under or over age 75.

Other videos you might like:

The pension lifetime allowance and lifetime allowance charge explained:

Check out other videos in my pensions playlist:

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What Happens To My Pension When I Die?

Planning for the future is an essential part of responsible financial management, and one key aspect to consider is what will happen to your pension when you pass away. While nobody likes to think about their own mortality, it is crucial to understand what will happen to your hard-earned pension savings so that you can ensure your loved ones are taken care of after your death.

When it comes to your pension, what happens next largely depends on the type of pension scheme you have and the choices you make throughout your life. Let’s explore the possible scenarios.

State Pension:
The State Pension, which is provided by the government, cannot be passed on directly to your loved ones after your death. However, if you are married or in a civil partnership, your spouse may be eligible for a bereavement benefit, such as the Bereavement Allowance or the Widowed Parent’s Allowance. These benefits will vary based on your circumstances, so it is crucial to check with the relevant authorities.

Defined Contribution Pension:
If you have a defined contribution pension, whereby the value of your pension is based on the contributions made throughout your career, what happens to it will largely depend on your choices. Firstly, if you have yet to reach the age of 75, your pension can be passed on to your beneficiaries tax-free, provided it is transferred into their own pension scheme. This means that they can continue to invest or withdraw the funds as they see fit.

However, if you die after reaching the age of 75 or if you have already started withdrawing funds from your pension, then the tax treatment changes. Your beneficiaries will still be able to inherit your pension, but they will have to pay income tax on any withdrawals they make.

Defined Benefit Pension:
For those with a defined benefit pension, also known as a final salary pension, the situation is different. A defined benefit pension provides a guaranteed income upon retirement linked to your salary and years of service, rather than a specific pot of money. Typically, the amount received is a percentage of your final salary.

In the unfortunate event of your death, many defined benefit pensions will provide a spouse’s pension or dependant’s pension. This means that your spouse or partner will continue to receive a portion of the income you were receiving until their death. The amount they receive will usually be a percentage of your pension entitlement, depending on the rules of the particular scheme.

It is important to note that the amount paid as a spouse’s or dependant’s pension may vary among different pension schemes. Some schemes may also offer a lump sum payment upon your death, providing additional financial support to your surviving loved ones.

In all cases, it is advisable to review the specific terms and conditions of your pension scheme and seek professional advice to fully understand what will happen to your pension when you pass away. By doing so, you can make informed decisions to ensure your loved ones are taken care of financially.

Planning for the future can be challenging, but understanding what will happen to your pension when you die is a crucial step towards ensuring financial security for your beneficiaries. Take the time to review your pension scheme, consider your options, and seek professional advice if necessary. Your diligence now will provide your loved ones with peace of mind during a difficult time.