Wealth of Advice, Swale House, Mandale Business Park, Durham, DH1 1TH
Pensions are an important part of planning for retirement, but many people overlook what happens to their pension after they die. Episode 4 of the Retire Well with Wealth of Advice podcast explores this often-avoided topic, explaining how different types of pensions are treated, and how planning ahead can preserve value for your loved ones.
Hosts Joe and Matthew, Chartered Financial Planners, cover the key considerations for state pensions, annuities, defined benefit pensions and defined contribution pensions. They also share practical tips for nominations and estate planning.
Planning for pensions on death is not just about money. It is about ensuring that your family or chosen beneficiaries can continue to enjoy the lifestyle that you have planned for. Many clients avoid thinking about it, but making informed decisions can save your loved ones unnecessary stress and tax charges.
The State Pension is usually paid only to the individual who earned it. Those on the New State Pension (Post 2016) will no be able to pass any on.
However, some older versions of the State Pension to account for death benefits. It is important to check the rules applicable to your section, as benefits and eligibility can vary depending on when the pension was earned and the ages of both partners.
When considering an annuity, the choices you make can significantly affect what happens to your income after death. Here is a straightforward comparison:
• Provides guaranteed income for your lifetime only.
• Payments stop immediately on death.
• Usually offers the highest income compared to joint life or guaranteed term annuities, since there is no obligation to pay after death.
• Designed to provide income for both you and a spouse or partner.
• Payments continue to the surviving partner, often at 100% or a reduced percentage (e.g., 50–75%) of the original income.
• The income is generally lower than a single life annuity because it covers two lifetimes.
• Useful for couples who want to ensure financial security for the surviving partner.
• Pays income for a fixed number of years, even if the annuitant dies early.
• If you die within the guaranteed period, the remaining payments go to your nominated beneficiaries.
• Combines elements of security for your family while providing income for yourself.
• Typically results in lower income than a single life annuity without a guarantee, but higher than a joint life annuity in some cases.
Choosing between these options depends on your personal circumstances, your family situation, and your retirement goals. A professional financial planner can help you balance income, longevity, and inheritance objectives to select the most appropriate annuity.
Defined benefit (DB) pensions often include built-in death benefits. These can take the form of:
• Lump sum payments may be payable to your beneficiaries on death. The amount depends on your scheme rules, age at death, and whether benefits have been commuted for cash.
• Spouse or civil partner pensions are common. These provide a percentage of your accrued pension to a surviving spouse or civil partner, typically 50–100% of your pension, depending on the scheme.
• Dependents’ pensions can extend beyond spouses and civil partners. Some schemes provide benefits for dependent children, often until they reach a certain age (e.g., 18, 23 if in full-time education).
Reviewing your DB scheme rules is essential to ensure that nominations are up to date and that dependents.
Defined contribution (DC) pensions offer flexibility for death benefits, but planning is crucial.
• You can nominate beneficiaries to receive your pension pot. These nominations ensure the money goes to the intended recipients rather than being subject to the rules of intestacy.
• If you die before age 75, pension pots are usually paid tax-free to beneficiaries.
• If you die after age 75, withdrawals by beneficiaries are taxed at their marginal income tax rate.
• Using flexi-access drawdown effectively can preserve the pension for heirs while allowing you to manage your income during retirement.
Keeping your nominations updated and reviewing the rules of your pension provider can prevent complications and ensure your loved ones receive the intended benefits.
• From 6 April 2027, most unused pension funds and death benefits will be included in a person’s estate for IHT purposes.
• The change will apply mainly to defined contribution schemes.
• Some exceptions will remain, such as certain death in service benefits payable from registered pension schemes, which will not be within scope of IHT.
• The legislation will place liability for reporting and paying the IHT on personal representatives (executors) rather than (or alongside) pension scheme administrators.
1. Check your nominations regularly to ensure they reflect your current wishes.
2. Understand your scheme’s rules regarding death benefits, including any lump sums or survivor pensions.
3. Consider professional guidance to optimise the tax efficiency of the pension after death.
4. Keep records and forms updated, including any necessary pension tracing documentation.
Pensions can provide significant value even after you die, but only if planning is done in advance. Ensure that your nominations are up to date and that you understand the benefits available under your pension schemes.
At Wealth of Advice, our Chartered Financial Planners can help you review your pensions, explain death benefits, and ensure that your estate planning maximises the value for your loved ones. Taking action today gives peace of mind for both you and your family.
If you want a better view of what your future could be, we'll have a chat and work out if we make a good fit for you and your financial picture.
Wealth of Advice are authorised and regulated by the Financial Conduct Authority, reference number 563909. This website is for information purposes only and is not personal advice.
We are committed to providing products and service of the very highest standards. If you feel that we haven't lived up to your expectations in any way, however, we would like to know so we can put things right for you. If you have a complaint, make sure you contact us directly. Accordingly, we will do all we can to resolve your complaint by the end of the next business day. However, if we can't do this, we will write to you within five working days to tell you what we have done to resolve the problem, or acknowledge your complaint and let you know when you can expect a full response. Furthermore, if we haven't issued our response within eight weeks from the date you first raised your complaint, or if you're dissatisfied with our response, you can ask the Financial Ombudsman Service - www.financial-ombudsman.org.uk - for an independent review. The Financial Ombudsman Service will only consider your complaint once you've tried to resolve it with us, so please take up your concerns with us first and we'll do all we can to help.
Wealth of Advice Ltd is a company registered in England and Wales, company number 07709624.
VAT Number: GB131946515