What Happens to Your Pension When You Die?

Tom Selby: What happens to your pension when you die? Now, I know it might feel a little bit morbid, but it is sensible to think about your money, where your money will go when you’re no longer around, and that includes your retirement pot. Different types of pension are treated in different ways on death. So let’s go through each in turn and we’ll kick off with the state pension. The flat rate state pension which pays a maximum £179.60 per week in 2021-22 cannot be inherited, so it’s yours and yours alone. Those who reached state pension age before 2016 may however have been able to inherit state pension from their spouse.


Now turning to defined contribution pensions. If you have a defined contribution pension, your retirement pot will be invested in things like stocks, shares and bonds. Defined contribution pensions that are either untouched or have been put into drawdown. So drawdown is where you take out an income while your retirement pot is invested can be passed on to anyone you choose. They’re usually not subject to inheritance tax and can be paid tax free if you die before age 75. If you die after age 75, they’ll be taxed in the same way as income, when you’re nominated beneficiary comes to access the money.


Now turning to defined benefit pensions, which lots of people will have. Defined benefit pensions are pensions paid by your employer and are based on the number of years that you have worked, so you’ll get a guaranteed income at a set retirement day. Usually defined benefit pensions come with a spouse’s pension attached and that might be somewhat pay an income somewhere in the region of 50% of the income you’d have received from that scheme.


Finally turning to annuity so that’s where you buy a guaranteed income from an insurance company. If you bought a single life annuity, then it’s likely that your spouse or your partner won’t receive any money from that product. If you bought a joint life annuity, then your spouse, your partner, your nominated beneficiary should receive a portion of your income when you die.


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