Two common misconceptions about pensions upon death are:

  1. My pensions die with me.
  2. My pensions are distributed according to the will.

In most cases, neither of the above statements are accurate.

Pensions and Your Estate

A significant benefit of having funds within a pension is the fact that it sits outside your estate, making it exempt from inheritance tax and probate. This means it can be paid out more quickly, but it also means it isn’t governed by the terms of your will.

Types of Pensions: Defined Benefit vs. Defined Contribution

The treatment of pensions upon death varies depending on the type of pension. Here’s a brief recap of the two main types of pensions:

Defined Benefit Pension: This is a promise of guaranteed lifelong income from an employer.

Defined Contribution Pension: This is a fund that grows over time through contributions from both you and your employer. The fund then can be used to provide you with an income.

What Happens to Defined Benefit Pensions?

Defined Benefit pensions have a straightforward approach upon death. If you pass away, your dependent (typically a spouse, civil partner, child under 23 and sometimes a cohabiting partner, if dependent) would usually receive a ‘Survivor’s Pension’ for the rest of their life. This tends to be between  50% and 75% of the pension you were entitled to at the time of death. Any pension income paid to a dependent is taxed as earnings under income tax rules. Upon the death of your dependent, the pension payments would cease altogether.

What Happens to Defined Contribution Pensions?

For Defined Contribution pensions, it is the trustees of the pension scheme who determine the recipient(s) of your pension upon your death.

You can complete a form known as an “Expression of Wishes” or “Beneficiary Nomination” to indicate to the trustees to whom you’d prefer your pension to be paid. These beneficiaries don’t need to be dependents and can be anyone of your choosing. While the trustees typically consider these preferences, the final decision rests with them regarding who receives your pension upon your passing.

If you were to pass away under 75, the beneficiaries can usually draw from the pension tax-free. If you pass away after age 75, the beneficiaries of your pension will be subject to tax on anything they draw from the pension.

Importance of Keeping Your Expression of Wishes Up to Date

Since your will does not dictate to whom your pension is paid, it’s vitally important to keep your Expression of Wishes up to date. A recent study indicated that over 750,000 people near retirement were at risk of passing their pension to an ex-spouse or ex-partner, highlighting the importance of ensuring that they remain suitable.

If you are a Transact user, with a Transact personal pension, you can review your current nominated beneficiaries on Transact by selecting “Housekeeping” followed by “Reconfirm Pension Beneficiaries”. If you’d like to update your Expression of Wishes, please let us know, and we will send you the required forms. Please note that if you have pensions outside of Transact, the provider of that pension will have their own forms that need to be completed and you will need to contact them.

We highly recommend that all our clients ensure they have an Expression of Wishes in place for all their pensions and make sure these continue to reflect their wishes.

Links:

https://www.moneymarketing.co.uk/analysis/neil-macgillivray-expression-wish-forms-can-let-clients/#:~:text=Neil%20MacGillivray%3A%20When%20expression%20of%20wish%20forms%20can%20let%20clients%20down,-Neil%20MacGillivray%2024&text=Headlines%20earlier%20this%20year%20drew,updated%20their%20expression%20of%20wish

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