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What Happens to Your Private Pension When You Die?

Written by, Marija Petkova

Updated May, 23, 2022

Most of us work hard to build up our pension pot so we can enjoy our retirement years. But, what if things don’t go according to plan?

Here’s what you need to know about what happens to your private pension when you die and how to make sure your pension is passed on.

Does the spouse get a pension after death in the UK?

If you’re married or in a civil partnership, your spouse or partner may be able to claim your private pension after you die. Whether they can do this and how much they’ll receive depends on the type of pension scheme. 

What happens to defined benefit pensions?

If you have a defined benefit pension, your spouse or civil partner will usually receive a pension after you die. Spouses, civil partners, and children under the age of 23 in full-time education are eligible for this type of pension. 

This is because most defined benefit pensions are designed to provide a retirement income for life. 

In most cases, the pension administrator only pays a percentage of the pension that the deceased was receiving or was due to receive. 

Lump sums from a defined benefit pension

If your pension is modest, your beneficiaries may be able to receive it as a lump sum.

Similarly, if you die before you retire, your spouse or civil partner may be entitled to a lump sum of your defined benefit pension. The amount and whether they are eligible to receive it depends on the rules of the pension scheme.

In some cases, the lump sum is equal to the value of your pension benefits. In other cases, it’s a percentage of the value of your pension death benefits.

Pension protection lump sum

When you start getting a scheme pension, you can set a guaranteed amount to be paid within a certain period (5-10 years)

If you die within the guarantee period, a lump sum is paid to your beneficiaries. This amount is usually the equivalent of the pension payments that are due to be paid between your death and the end of the guarantee period. 

The lump sum is tax-free if you die before age 75. Otherwise, it’s taxed as income for the beneficiaries.

What happens to defined contribution pensions?

With a defined contribution pension, you (or your employer) pay money into the pension pot. This money is then used to buy an annuity, which provides a retirement income for life.

As such, the rules for this type of pension are different.

What happens if no money was taken from the pension pot?

If no money has been taken from the pension when you die, and you are aged 75 or under, your beneficiaries will usually be able to take the money from the pension pot as a lump tax-free lump sum

They can also buy an annuity or set up a pension drawdown, though this is not always possible.

What happens to my drawdown pension when I die?

If you’ve chosen flexible retirement income, where your pension savings remain invested and you take a stipend whenever you need it, your dependents can continue to receive an income from your pension after you pass away or take the money as a lump sum.

 If you die before the age of 75, your beneficiaries must pay income tax on any money they receive from your pension.

What happens to my annuity when I die?

If you’ve opted for a single annuity, the payments will stop when you die.

If you’ve bought a joint annuity, the partner will continue to receive monthly payments after you pass away.

What about pension inheritance tax?

Any assets, including savings and cash, are considered part of the estate and are subject to Inheritance Tax, except in cases where the pension is set up under a discretionary trust. 

Also, surviving spouses are exempt from Inheritance Tax in most situations.

The amount of tax your other beneficiaries will have to pay will depend on their relationship with you and the value of your estate. Your beneficiaries may avoid the Inheritance Tax if you take advantage of the 7-year rule.

If my husband dies do I get his state pension?

You may be eligible for extra payments for your spouse or civil partner’s state pension if you haven’t already built up a full basic state pension on your own National Insurance record.

The amount and whether you can claim it depends on the National Insurance contributions they made and when you reached or will reach the State Pension age. 

If they die before you reach state pension age and you remarry or enter a civil partnership, you will not be eligible for their state pension.

Who qualifies for a Widow’s Pension?

The UK government replaced Widow’s Pension, Widowed Parent’s Allowance, and Bereavement Payment with Bereavement Support Payment (BSP). To qualify for it, the living spouse has to be below the State Pension age.

This pension can be claimed by a spouse or a partner in a civil partnership within 21 months of their spouse or partner’s death. If the spouse claims BSP within the first 3 months of their spouse or partner’s death, they will get the full amount. If they apply for it later, they will still be approved for BSP, but will receive fewer payments. 

Widowers are generally entitled to a lump sum of £2,500 or £3,500, followed by regular payments of up to 18 months under this program that range between £100 and £350.

They can still claim BSP after the 21 months have passed only in cases where the death of the spouse had been confirmed after that period. 

Also, UK residents can claim Widowed Parent’s Allowance if their spouse or civil partner died before 6 April 2017 and they have one or more dependant children.

How do you nominate a beneficiary?

You can nominate a beneficiary of a pension by filling in a form provided by your pension provider.

If you do not nominate a beneficiary, the pension will be transferred to your estate.

Bottom Line

Pension plans are an important part of retirement planning, and it’s crucial to understand what happens to your private pension when you die. This can help you pick the right pension scheme and negotiate rules that can benefit you and your family in the long run.