What happens if you die and still have your pension?
Please note there is an updated version of this blog here: http://www.investorprofile.co.uk/what-happens-pension-die-2015
So if you are going to put lots of money into a pension plan that cannot be easily accessed until you reach age 55 then you probably want to know what happens to the money if you die before you take an income from it, or even after you do. Here is a quick rundown of the rules as things stand. Of course if you think you would benefit from a little investment planning advice then please do contact us for help.
Not taken your Pension (before 75)
If you hold assets in a pension plan, having never taken any benefits from it (known as uncrystallised benefits) and die before the age of 75 then the entire amount of those assets will pass to your nominated beneficiary free of inheritance tax and free of any pension tax charge. The assets will pass to your beneficiary as a lump sum outside of the pension wrapper.
Not taken your Pension (after 75)
If you hold assets in a pension plan, having never taken any benefits from it, and die after the age of 75 then the value of your pension will again pass to your nominated beneficiary, minus a 55% tax charge, in the form of a lump sum of cash. There will be no inheritance tax implications as above.
Taken your Pension via Drawdown (any age)
If you have taken your pension in the form of a drawdown arrangement and you die with any amount of assets still held within the pension, then those assets can be passed on to your nominated beneficiary for them to hold the drawdown pension just as you did and for them to benefit from the income. The alternative option is for your beneficiary to use the value of the pension to buy an annuity. With either of these options there would be no tax charge or inheritance tax implications. However if your beneficiary chooses to take the value of the assets within the pension as a lump sum payment then there will be a 55% tax charge, regardless of the age at which you pass away.
Taken your Pension via an Annuity (any age)
If you decide to use your pension to purchase an annuity then the situation is lightly different in that you will have already chosen what you want to happen after you have gone when you applied for the annuity. Typically you can choose to have a proportion of the income you were receiving payable to your spouse or dependent(s). You can also choose to have the income under the terms of your annuity payable for a minimum number of years, known as the guarantee period.
Hopefully that helps to clarify the situation if you were wondering. One very important aspect of this that I have mentioned throughout is the need to nominate a beneficiary. Most pension plans are set up under the entity of a trust. You do not need to do anything, that is just how they are legally set up with the provider. However what you can do is indicate to the trustees how you wish the value of your pension to be passed on upon death. This is normally done via a Nomination or Expression of Wishes form. The pension provider will usually have one for you to complete. It is important that you complete one of these so that you know exactly what will happen to your assets upon death and to make sure they go to the right person, quickly and easily.