Passing on your pension

One of the most common questions our clients ask us is, “What happens to my pension when I die?“.

We get it. You’d like to provide for your loved ones even after you’ve gone. It’s only natural. And your pension, which may well be one of your most valuable assets, could hold the potential to provide that all-important ongoing support.

But what your beneficiaries will receive, and the flexibility with which they can access their inheritance, depends on the choices you make now.

At My Pension Expert, we consider what you hope to pass on to your loved ones when making our recommendations, providing information and advice to help you keep looking out for them, even after you’ve gone.

So, read on to find out how you can pass on your drawdown or annuity, as well as the impact of turning 75 on the tax position of your beneficiaries.

What happens to your pension drawdown when you pass away?

With drawdown, the legacy you leave behind can be significant. Depending on your age at the time of your passing, your pension can often be passed on both flexibly and tax-free, offering a substantial benefit to your beneficiaries.

When you pass away, your remaining drawdown fund is paid to your beneficiaries in full. Your loved ones will have the flexibility to receive it as a lump sum or transfer the existing plan into a plan in their name to access income as needed. They can even exchange the value of the plan for an annuity.

Passing on a lifetime annuity

By default, when you pass away, income from a lifetime annuity will stop. This is because your pension pot has been used to purchase a guaranteed income for your lifetime. However, many annuity providers offer a range of extras that you can add to your plan when you set it up – these are known as death benefits.

Types of death benefits

With value protection, you can pass on the annuity purchase amount, minus any income you’ve already taken, to your estate.  

For example, say you purchase a lifetime annuity with £100,000, take £5,000 annual income, and pass away after receiving two payments. The remaining £90,000 (minus any fees) would be paid to your beneficiaries.  

With a joint-life policy, both you and your partner receive income from the plan. If one of you passes away, the surviving partner will continue to receive either full or partial payments for the rest of their life.

You can choose how much the surviving partner receives when you purchase your annuity.  Your provider will consider your partner’s health and lifestyle, as well as the size of their payments as a survivor, when calculating your annuity rate.

A guarantee period makes sure that your income will be paid for at least that long, even in the event of your death. You can typically choose a guarantee period of between 1 and 30 years.

So, in the event of your death, any remaining payments within your chosen guarantee period are paid to your estate either as a lump sum or regular payment. 

It’s important to note that your choice of death benefits will impact your annuity rate.

Your annuity will typically sit outside of your estate for inheritance purposes, but this isn’t always true for those passed on under a guarantee period. However, whether or not a beneficiary will need to pay income tax on any funds received depends on your age when you pass away.

Passing on a fixed-term annuity

A fixed-term annuity is passed on in the same way as a lifetime annuity – you’ll typically need to include death benefits in your plan to determine how much of your pension your beneficiaries will receive and how they’ll receive it.

However, at My Pension Expert, we normally recommend value protection as standard when it comes to a fixed-term annuity. This guarantees that, should the worst happen, your chosen beneficiaries will receive at least the value of your purchase amount minus any fees and income already taken. Depending on your specific policy, it may be more.

Of course, your adviser will explain the specific details of your recommended policy to you if a fixed-term annuity is identified as the best option for your circumstances, and can tailor it as necessary to suit your needs.

Choosing your beneficiaries

Informing your pension provider of your chosen beneficiaries is crucial. Although not legally binding, your wishes must be considered by the pension’s trustees. We recommend you regularly review and update your beneficiaries as your circumstances change.

Advice on passing on your pension

As you may have gathered, the possibilities for passing on your pension and the tax implications for each can vary greatly from person to person; they’re very much dependent on your individual circumstances and pension product that you choose. Not to mention, the rules are subject to change in future.

Getting advice from an independent financial adviser can help you understand the impact of your choices when it comes to passing on your pension. Their recommendation can help you to find the solution that best suits your needs and objectives, both now and in the future.

Give us a call today to discuss your options and secure your legacy.