This is a question we get asked a lot, usually because people are concerned that it will “die with them” and leave their family with a hole in the household income.
What happens depends entirely on the type of pension you have. For ease of understanding, we’ve broken down each type of pension, as each follows a different course.
Group Personal Pension/Personal Pension/SIPP/Drawdown
You will have one of these types of pension if you currently save or have saved into a ‘pot’ of money during your working lifetime and/or personally.
A significant number of Magenta clients have these types of arrangements.
Death Benefits
The amount of money you have in the fund at the point of death is passed to your beneficiaries, much like other assets, such as savings and investments you may have, which form part of your estate.
The important difference is that your pension is held under a trust with the pension provider and does not form part of your estate, meaning it is inheritance tax (IHT) efficient.
You can elect beneficiaries through an ‘expression of wishes’ document. It is important to understand that this election isn’t binding on the trustees of the trust, but unless there is very good reason, they will follow your wishes.
You can elect whoever you want in any proportion, meaning the death benefits are very flexible under this type of pension.
Tax
If you die under age 75, all holdings pass tax free to your beneficiaries. If you die after age 75, benefits are taxed as if it is earned income, at their income tax rate, when drawn by the beneficiary.
Top tip
If you have this type of pension, make sure to complete an expression of wishes document and send it to your pension provider. If you are a Magenta client, speak to us if you don’t believe you have completed one or would like to update it.
Defined Benefit
These are sometimes known as final salary pensions and this type of arrangement pays a specific income each year as a guaranteed inflation-linked income.
The guidance we can offer on the death benefits these types of arrangements is vague, because each scheme does things differently.
Death Benefits
This is specific to each pension scheme, but as a rule of thumb you can expect 50% of the annual pension income to be paid out.
If you have yet to draw the pension, the amount payable should be at least 50% of the projected pension at scheme retirement age.
If you have already started drawing the pension, it will be 50% of the current pension.
These pensions should increase each year in line with the scheme rules, usually tied to an inflation figure, such as RPI, to keep up with the cost of living.
Tax
Income from this type of pension will be taxed as if it were your own income, at your rate of income tax.
Top Tip
If you have this type of pension and are not married, check with the trustees or the pension scheme rules, to see if the pension is payable to partners and/or children in the event of death, as some schemes do, and some do not.
Annuity
You would have this type of arrangement if you gave up a pension fund or cash to buy an annuity, paying you a set income, usually for life, from an insurance company.
Death Benefits
This will depend entirely on the options you chose at the commencement of the annuity and as such there is no ‘standard’ or rule of thumb when it comes to these types of pensions.
If you have selected for there to be residual benefits on death, it could either be an ongoing income for a partner/spouse for the rest of their life or a lump sum is paid.
Tax
Income from this type of pension will be taxed as if it were your own income, at your rate of income tax.
Top Tip
Speak to your annuity provider, your adviser or look at your policy documents to understand what death benefits your annuity has.
If you want to better understand your pension death benefits or want to ensure your pensions will be left to those you wish, get in touch and we would be happy to help.