Pensions and death benefits

One of the important benefits often associated with pension arrangements is the availability of benefits payable on or after your death. These benefits are very important as they are the means by which you can make financial provision for dependants and beneficiaries. 

The benefits payable depend on the type of pension scheme that you may be in and other circumstances such as whether or not you have dependants. 

Benefits may be paid in a lump sum or could be in the form of a pension payable to dependants such as your spouse, civil partner or children. 

You should find out about the benefits that would be paid in the event of your death. If no benefits are payable or if these would be insufficient to provide for your dependants, then you should look at taking out life assurance cover or increasing the level of benefits payable. 

The State provides a basic pension benefit to Widows, Widowers and Surviving Civil Partners. 

Dependants and beneficiaries 

Pension arrangements provide benefits to you when you retire. This makes you a beneficiary. 

They also can provide benefits to other people in certain circumstances such as in the event of your death. These people are also beneficiaries and they are usually your spouse, civil partner or children. But the definition of beneficiaries can be broader than that. Dependants are people that are financially dependent on you. Beneficiaries don't have to be dependants. 

The way benefits are paid on death depends on the type of pension arrangement you have. 

For most pension arrangements, lump sums are paid into a member's estate. But for pension arrangements set up under a trust, you may be asked to nominate beneficiaries to receive the benefit. To do this you can use a document called an "Expression of Wishes", "Wishes Letter" or "Nomination Form". 

The trustees will take your wishes into account but are not bound by them. 

For dependants' pensions, these are paid to dependants as defined under the scheme rules and may cease as defined, for example when a child reaches a certain age. 

Where pensions are payable to dependants, you need to advise your pension contact of any dependants you have; otherwise you may not be covered for the benefits you expect. 

Benefits payable on death in service as a lump sum 

Some pension arrangements provide lump sum benefits to beneficiaries in the event of a member’s death. 

The lump sum benefits payable depend on the type of pension arrangement that you may be in and other circumstances such as whether or not you have dependants. 

Example 

Anne is a member of a pension scheme. Her salary is £40,000 and she is covered for a lump sum death benefit of 3 times salary. If Anne dies, a benefit of £120,000 is payable to her estate or directly to her beneficiaries. 

You should find out about the benefits that would be paid in the event of your death. If no benefits are payable or if these would be insufficient to provide for your dependants, then you should look at taking out life assurance cover or increasing the level of benefits payable. 

Benefits payable on death in service as a pension to dependants 

Some pension arrangements provide pension benefits to dependants in the event of a member’s death in service. Typically these benefits are a percentage of salary or a percentage of the pension the member would have received at retirement. 

The pension benefits payable depend on the type of pension arrangement that you may be in and other circumstances such as whether or not you have dependants. 

Example

John is a member of a pension scheme. His salary is £60,000 and he is covered for a spouse's pension benefit of 1/3rd of salary. If John dies, a pension benefit of £20,000 per annum is payable to his spouse or civil partner. 

You should find out about the benefits that would be paid to your dependants in the event of your death. If no benefits are payable or if these would be insufficient to provide for your dependants, then you should look at taking out life assurance cover or increasing the level of benefits payable. 

Where pensions are payable to dependants, you need to advise your pension contact of any dependants you have; otherwise you may not be covered for the benefits you expect. 

Benefits payable on death after retirement 

Some pension arrangements provide pension benefits to dependants in the event of a member’s death after retirement. This may be determined by the rules of the pension arrangement or may be as a result of choices made by the member at retirement. 

The benefits payable depend on the type of pension arrangement that you may be in and other circumstances such as whether or not you have dependants. 

Example 

James is a member of a pension scheme. His pension is £30,000 per annum and he is covered for a spouse's pension benefit of 50% of pension. If James dies, a pension benefit of £15,000 per annum is payable to his spouse or civil partner. 

Benefits payable on death after leaving service 

If a member leaves service of an employer with a future entitlement to a pension benefit, or stops paying into a personal pension arrangement or PRSA, and subsequently dies before any pension benefits become payable, then a death benefit will be paid. 

The benefits payable depend on the type of pension arrangement that you may be in and other circumstances such as whether or not you have dependants. 

Example 

Lynne left service a number of years ago. The current value of her pension benefit under her previous employer's scheme is £150,000. If Lynne dies, this lump sum amount will be paid into her estate.

Pensions and inheritance tax

What happens to your pension when you die?

The good news is that your family can inherit any remaining money in your pension pot that you haven’t yet spent or converted to an annuity. This makes your pension a very tax-efficient way to pass on your wealth – and one that you can even use to reduce inheritance tax (IHT) on the rest of your estate.

Can my family inherit my pension?

When you die, any unspent money in your pension pot can be passed on to one or more beneficiaries of your choice. This assumes you have a defined contribution (money purchase) pension scheme, which is the case for most workplace pensions and all private pensions.

Note that this only holds true if you have unspent pension pot remaining. This may not be the case if you have already bought an annuity.

What happens to my annuity when I die?

An annuity is a guaranteed income for life (rather than a pot of money) – and by definition, an income for life ends when your life ends. This means it can’t be passed on as such. However, you can arrange for your partner to continue receiving an income from your annuity after your death. To do this, you’ll need to choose a ‘joint-life annuity’.

You could of course choose to spend only part of your pension pot on an annuity. In this case, the unspent portion will be inheritable as normal.

What happens to my final salary pension if I die?

If you have a defined benefit (final salary) pension, there is no pension pot to pass on. However, the terms of your scheme may make provision for your spouse and/or other dependants. Ask your scheme administrator what will happen in the event of your death. Alternatively, some final salary schemes let you transfer out into a defined contribution pension, which you can pass on to your family. A transfer may not be the best option for you, though, so ask your financial adviser.

What happens to my SIPP when I die?

If you have a personal pension, such as a SIPP or a stakeholder pension, this can be passed on to your beneficiaries just as a workplace (defined contribution) pension can be. You just need to make sure you follow the necessary steps laid out below under ‘How do I choose who inherits my pension?’

What happens to my state pension when I die?

In most cases, payment of your state pension will stop completely when you die, and does not pass to your spouse. However, there are a few circumstances in which your spouse will continue to receive a portion of your state pension after your death.

If you have the Additional State Pension

Before the current ‘new state pension’, the state pension consisted of two parts: basic and additional. If you reached state pension age before 6 April 2016, you may have built up some additional state pension. If you married before 6 April 2016, your spouse can inherit a portion of this when you die.

Similarly, you can inherit some of your spouse’s additional state pension if they reached state pension age before this date (or if they would have reached it on or after that date, but have died).

Any inherited additional state pension is paid with the surviving spouse’s state pension.

If you have a protected payment

Some people may have a ‘protected payment’, if they built up more state pension than the maximum amount of the new state pension before it was introduced (to avoid them losing out under the new scheme). If your basic state pension plus additional state pension would have entitled you to more money than the new state pension alone, then this excess is your ‘protected payment’.

If you married before 6 April 2016, your spouse will inherit half of your protected payment (and vice versa).

How do I choose who inherits my pension?

Your pension isn’t legally part of your estate, so is not covered by your will. You have to make arrangements with your pension provider by filling in a form – this may be called an ‘expression of wish’ form or a ‘nomination of beneficiaries’ form, or something similar.

The crucial thing is to make sure that these arrangements are kept up to date. Usually you will complete an expression of wish form when you join a pension scheme. If you’ve had several pension schemes over your working life, then the beneficiaries you’ve nominated may be different in each case – for instance, an ex-spouse or partner, rather than your current one.

You should therefore make an effort to track down your pensions and update your wishes with each provider. It may make more sense to combine your pensions – however check with your adviser first, to make sure you don’t lose any special benefits like guaranteed annuity rates.

Also keep your will up to date. Though it doesn’t directly cover your pensions, it can help to resolve any disputes that may arise.

It will then be up to your chosen beneficiaries to contact your pension scheme provider(s) after your death, to find out how they can claim your remaining pension benefits.

Quick tips for bequeathing your pension

1. Keep records of your pensions and tell your family where to find them.

 2. Contact pension providers to check who is due to inherit your pension, and update the details if necessary.

 3. Keep a copy of all paperwork.

 4. Be sure to review all pensions if your relationships change.

 5. Combine your pension pots if your adviser recommends it.

Is my pension subject to inheritance tax?

Pension pots are not subject to inheritance tax when you die. If you die before the age of 75, the person(s) who inherits your pension pot can draw on the money as they wish, without paying any income tax either. 

However, if you are 75 or over when you die, a beneficiary of your pension pot will have to pay income tax on any withdrawals at their marginal rate (i.e. the highest rate of income tax that they pay).

If your beneficiary is entitled to continue receiving payments from an annuity or defined benefit pension after your death, then these payments will be subject to income tax at their marginal rate.

Can I use my pension to reduce inheritance tax?

If your estate is large enough to be potentially subject to inheritance tax, you may be able to use your pension to reduce or even eliminate your inheritance tax bill.

Since pension pots fall outside your estate and are not taxed upon your death, you could potentially move savings and investments (which are taxable) into your pension pot by making additional contributions. This has the added advantage of increasing your pension pot and boosting your savings through tax relief. If you do this, however, be careful to stay within your pension allowances (your annual allowance reduces after you start to draw your pension).

Another option is simply to spend other assets first and preserve your pension for as long as possible, or until your estate is below the IHT threshold.

To find out more about pensions or inheritance tax, talk to a financial adviser.

How your pension might be taxed

Like any form of income, most money you take from your pension is subject to income tax. However, with careful planning you can manage your tax bill in retirement and prevent unnecessary losses.

To make sure you’re getting the most from your retirement savings, it’s important to understand how tax on pensions works, and how it could affect your retirement income.

Drawing income from your pension pot

If you have one or more workplace pensions or personal pensions, each of these will be a pot of money from which you can draw an income from the age of 55. When you do, 25 percent of what you draw out will be completely free of tax. You can do this all in one go (people call this the ‘tax-free lump sum’), or you can draw a series of smaller lump sums, with 25 percent of each being tax free).

The rest of the money you draw from your pension pots is taxed as ordinary income. Any other income you may have (e.g. the State Pension) is also included in the total. So if the total rises above your personal allowance, you will start to pay income tax – first at the basic rate and then at the higher rate, if your income is large enough in any given year.

Managing your tax bill – why you need to take care

Today’s pensions give you a lot of freedom to take the level of income you want. You can even draw out a whole pension pot as a lump sum. However, you should be very careful when doing this, and always seek advice first. This is because a large single withdrawal may result in a lot of taxable income in that year.

For example, if you have a pension pot of £100,000 and take £25,000 as your tax-free lump sum, then also take out the remaining £75,000, your taxable income will be £72,094 (if you also are receiving the full State Pension). Of this, £32,000 will be taxed at 20 per cent, and £40,094 will be taxed at 40 per cent – leading to a total tax bill of £22,437.

However, for a very small pension pot (which you might have from a short-term job), it may be possible to take the whole sum out without pushing your income too high. Alternatively, you may want to combine your pensions into a single fund. Talk to your adviser about the best course of action.

 Can it make a difference how I take my pension income?

There are several different ways to draw your pension. Some of these may make it easier to manage your tax bill than others.

For example, with drawdown you can vary your annual income, so you could choose to reduce it if in a particular year your received income from another source, which might increase your tax bill.

However, if you have an annuity you will receive a fixed income every year – even if you don’t need it for whatever reason. This means that, if you were to receive additional income from another source, your annuity might result in a higher tax bill.

Whether or not these issues affect you will depend on your lifestyle in retirement. 

Is there any other pension tax I should know about?

Income from your pension can be subject to an additional tax charge if your pension has grown very large, and so exceeded the lifetime allowance.

Pensions & Tax Relief

Tax relief on pension contributions explained.

Find out how the government tops up your pension savings in the form of pension tax relief, and use our pension tax relief calculator to see how much you'll get.

What is pension tax relief ?

When you save into a pension, the government likes to give you a bonus as a way of rewarding you for saving for your future. This comes in the form of tax relief. When you earn tax relief on your pension, some of the money that you would have paid in tax on your earnings goes into your pension pot rather than to the government. Tax relief is paid on your pension contributions at the highest rate of income tax you pay.

So:

• Basic-rate taxpayers get 20% pension tax relief 

• Higher-rate taxpayers can claim 40% pension tax relief 

• Additional-rate taxpayers can claim 45% pension tax relief 

In Scotland, income tax is banded differently, and pension tax relief is applied in a slightly alternative way. 

• Starter rate taxpayers pay 19% income tax but get 20% pension tax relief 

• Basic rate taxpayers pay 20%  income tax and get 20% pension tax relief 

• Intermediate rate taxpayers pay 21% income tax and can claim 21% pension tax relief

• Higher-rate taxpayers pay 41% income tax and can claim 41% pension tax relief 

• Top rate taxpayers pay 46% income tax and can claim 46% pension tax relief

How pension tax relief works.

If you are a basic-rate taxpayer and were to contribute £100 from your salary into your pension, it would actually only cost you £80.  The government adds an extra £20 on top – what it would have taken in tax from £100 of your salary. 

Higher-rate (40%) and additional-rate (45%) taxpayers only need to pay £60 and £55 respectively to achieve the same £100 of pension savings.

How do I claim pension tax relief ?

The way tax relief is claimed depends on the type of pension you are saving into, and it’s worth checking with your scheme to see what method it uses, as you might need to do some extra legwork to get the full tax relief you’re entitled to. 

There are two main ways:

Pension tax relief from ‘net pay’

A ‘net pay’ arrangement is used by some workplace pensions, and don’t require you to do anything to get your full tax relief. 

Pension tax relief at source

 ‘Relief at source’ applies to all personal pensions and some workplace pensions. So, if you have a private pension with an insurance company, or a self-invested personal pension (Sipp), this will apply to you. 

If you’re paying into a pension through your employer, your employer will take 80% of your pension contribution from your salary (technically known as ‘net of basic rate tax relief’). 

Your pension scheme then sends a request to HMRC, which pays an additional 20% tax relief into your pension. 

Under this system, higher and additional-rate taxpayers must complete a self-assessment tax return to receive the extra relief due to them. 

Your pension contributions are deducted from your salary before income tax is paid on them, and your pension scheme automatically claims back tax relief at your highest rate of income tax.

How much pension tax relief can I earn in 2019/20 ?

The government puts a limit on the amount of pension contributions on which you can earn tax relief. This is called the pensions annual allowance.  

It has been set at £40,000 for the tax year 2019-20. 

Any pension payments you make over the £40,000 limit will be subject to income tax at the highest rate you pay. 

However, you can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years.

Pension tax relief for non-taxpayers and low earners .

Non-taxpayers, including spouses who aren’t in employment and children, are eligible for tax relief of 20%, even though they don’t pay tax. 

Remember, you can save 100% of your income into a pension to earn tax relief, so long as it doesn't exceed £40,000 in a year.  

So, if you earned £5,000 a year, you could save £5,000 into a pension. 

But if you earn £3,600 or less, including people that don't earn any money, the maximum you can contribute is £3,600. This includes the government top-up, so your personal contribution can be no higher than £2,880.

Tax relief on pensions explained

Tax relief on pension contributions explained 

Find out how the government tops up your pension savings in the form of pension tax relief, and use our pension tax relief calculator to see how much you'll get. 

What is pension tax relief? 

When you save into a pension, the government likes to give you a bonus as a way of rewarding you for saving for your future. This comes in the form of tax relief. 

When you earn tax relief on your pension, some of the money that you would have paid in tax on your earnings goes into your pension pot rather than to the government. 

Tax relief is paid on your pension contributions at the highest rate of income tax you pay. 

So:

● Basic-rate taxpayers get 20% pension tax relief 

● Higher-rate taxpayers can claim 40% pension tax relief 

● Additional-rate taxpayers can claim 45% pension tax relief 

In Scotland, income tax is banded differently and pension tax relief is applied in a slightly alternative way.

● Starter rate taxpayers pay 19% income tax but get 20% pension tax relief 

● Basic rate taxpayers pay 20% income tax and get 20% pension tax relief 

● Intermediate rate taxpayers pay 21% income tax and can claim 21% pension tax relief

• Higher-rate taxpayers pay 41% income tax and can claim 41% pension tax relief 

● Top rate taxpayers pay 46% income tax and can claim 46% pension tax relief 

How pension tax relief works 

If you are a basic-rate taxpayer and were to contribute £100 from your salary into your pension, it would actually only cost you £80. The government adds an extra £20 on top – what it would have taken in tax from £100 of your salary. 

Higher-rate (40%) and additional-rate (45%) taxpayers only need to pay £60 and £55 respectively to achieve the same £100 of pension savings. 

How do I claim pension tax relief? 

The way tax relief is claimed depends on the type of pension you are saving into, and it’s worth checking with your scheme to see what method it uses, as you might need to do some extra legwork to get the full tax relief you’re entitled to. There are two main ways: 

Pension tax relief from ‘net pay’ 

A ‘net pay’ arrangement is used by some workplace pensions, and don’t require you to do anything to get your full tax relief. 

Your pension contributions are deducted from your salary before income tax is paid on them, and your pension scheme automatically claims back tax relief at your highest rate of income tax. 

Pension tax relief at source 

‘Relief at source’ applies to all personal pensions and some workplace pensions. So, if you have a private pension with an insurance company, or a self-invested personal pension (Sipp), this will apply to you. 

If you’re paying into a pension through your employer, your employer will take 80% of your pension contribution from your salary (technically known as ‘net of basic rate tax relief’). 

Your pension scheme then sends a request to HMRC, which pays an additional 20% tax relief into your pension. 

Under this system, higher and additional-rate taxpayers must complete a self-assessment tax return to receive the extra relief due to them. 

How much pension tax relief can I earn in 2019/20? 

The government puts a limit on the amount of pension contributions on which you can earn tax relief. This is called the pensions annual allowance. 

It has been set at £40,000 for the tax year 2019-20. Any pension payments you make over the £40,000 limit will be subject to income tax at the highest rate you pay. 

However, you can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years. 

Pension tax relief for non-taxpayers and low earners 

Non-taxpayers, including spouses who aren’t in employment and children, are eligible for tax relief of 20%, even though they don’t pay tax. 

Remember, you can save 100% of your income into a pension to earn tax relief, so long as it doesn't exceed £40,000 in a year. So, if you earned £5,000 a year, you could save £5,000 into a pension. 

But if you earn £3,600 or less, including people that don't earn any money, the maximum you can contribute is £3,600. This includes the government top-up, so your personal contribution can be no higher than £2,880