Saving for a pension is one of the most serious financial commitments that you’ll ever make. So what would happen to it if you died before you could enjoy it? Most of us who own homes or other substantial assets have made a will and have decided who to leave them to. However, a fifth of us have no idea who would inherit our pensions, according to a recent survey. Many people also don’t realise that their pension does not form part of their will.
According to research carried out last September by Scottish Widows, in addition to this, half of pension pot holders don’t realise that they need to update their will if they decide to leave their retirement savings to someone other than the person they first nominated. This means, for instance, that a partner you split up with years ago could end up getting their hands on your pension while your current partner loses out.
Over a quarter (28%) of those surveyed who are currently living with a partner weren’t aware that they need to change their will and to inform their pension provider, the research, which was carried out among 5,000 people revealed. Nearly a quarter (24%) of those who had split with a partner said that they had told their pension schemes immediately, while 16% had taken three months to do it and 50% weren’t even aware that they were meant to.
Don’t assume that just because you live with your current partner that they will inherit your pension. You’ll probably have to specify someone on your policy as the beneficiary upon your death. It’s worth checking to see who is named as your beneficiary for other savings and banks accounts in your name. The good news is that since the pension reforms of 2015 it’s easier to pass your pension pot on to someone else after you die. Most pension schemes allow you to choose almost anyone you want to inherit it. They will simply ask you to fill in a nomination form naming your beneficiary.
What your beneficiary might receive and how they receive it depends on whether your pension is a final salary also known as Defined Benefit (DB) or Defined Contribution (DC) pension. DC pensions are much easier to leave to someone else than are DB pensions. With a DB pension, which will usually be more generous than the DC variety, the number of people that you’re allowed to leave it to is often limited and there can be serious tax implications.
Annuities are very much out of fashion these days but if you have a joint annuity, payments will continue to the person that you’ve named as your beneficiary after you die but often at a reduced rate – perhaps a half of the total pay out – and income tax will apply. With those that have a guaranteed period such as five to 10 years, payments continue until the period ends.
Assuming that you haven’t bought an annuity then money in your pension pot is not subject inheritance tax. If you die before you reach 75 your beneficiaries can take benefits from your pension as either a lump sum or as income and they’ll pay no tax on it provided that your pot is below the lifetime allowance of £1million. On the other hand, if you die after the age of 75, your beneficiaries will be taxed at their marginal rate.
If they have no other taxable income they can currently take up to £11,500, which is the personal allowance, from a pension inheritance every year without paying any tax on it.
This means that if you have grandchildren, for instance, you could divide your pension pot up between a number of young people who don’t pay tax. This could help them with funding their first property, going travelling or with paying for college.
If you took out or set up a flexi access drawdown pension after 5 April 2015, any money paid within two years of your death will be paid tax-free. However, if your beneficiary claims the pension more than two years after your death then tax might be payable.
With the state pension your spouse or civil might be eligible for extra pension payments from your pension or National Insurance contributions, provided that you’re over the state pension age yourself.
The benefits that they might be able to receive and the way in which they go about applying for them depend on whether they reached State Pension age before or after 6th April 2016.
Contact the Pension Service for more information here.
Your pension can provide your loved ones with a valuable source of income or a useful lump sum. Checking to see who will currently inherit your pot pension is quicker and easier than most people think and transferring it to someone who you’d really want to see benefit is usually pretty straightforward. So contact your pension provider now and take action before it’s too late.