56 Fore Street, Kingsbridge, Devon, TQ7 1NY

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What happens to your pension pot when you die?

If you have money remaining in your pension pot

If you die before you take any money from your pension, it will usually be paid as a lump sum to your beneficiaries tax-free.

As long as it is less than the lifetime allowance (£1.25million in tax year 2015/16) it will be paid tax-free, unless you die at age 75 or older.

The Government has announced changes to the way death benefits from pensions are taxed:

  • If you die before age 75 – your pension can be paid to your beneficiaries tax-free, either as a lump sum, an annuity, or through flexible drawdown.
  • If you die age 75 or older – your pension can be paid as a lump sum which will initially be taxed at 45%. Or your beneficiaries can use flexible drawdown and will then only pay tax at their marginal rate.

There will normally be no inheritance tax to pay.

If you have taken money from your pension pot, what happens to the money left in it will depend on how you decided to use your pension pot.

If you have money left in a Flexible Drawdown

If you die before age 75 with your money in flexible drawdown your spouse, partner, dependent or beneficiary can:

  1. Stay in the Flexible Drawdown plan and take income tax free
  2. Take the Pension as a Lump Sum tax-free
  3. Buy an Annuity, where the income will be paid Tax Free

If you die after the age of 75 with your money in flexible drawdown your spouse, partner, dependant or beneficiary can

  1. Stay in the flexible drawdown plan and take income subject to tax at their marginal rate
  2. Take the pension as a lump sum which will be taxed at 45%
  3. Buy an annuity, where income will be subject to tax at their marginal rate

If you have an Annuity

If you chose a guaranteed period and die within this period then the annuity will continue to be paid until the end of the guaranteed period. If you bought a joint life annuity the annuity payments will continue to be paid to the second person, at the level you chose, until they die. If you die before age 75 the annuity payments paid will be tax-free, if you die after age 75 then any payments will be taxed as income at their marginal rate. In all other cases your money dies with you so no further payments are made.

What happens to your State Pension

Your basic State Pension is paid only to you and can’t be passed on to someone else when you die. If you have contributed towards an additional State Pension your spouse or civil partner may get some of this.
If your spouse or civil partner is over State Pension age when you die, they may be able to increase their basic State Pension by using your qualifying year’s entitlement. That is, as long as they don’t already get a full pension.
If your spouse or civil partner is under State Pension age when you die, any State Pension based on your qualifying year’s entitlement will be added to their State Pension when they claim it. For this to happen they can’t have remarried or formed a new civil partnership by the time they reach State Pension age.
If you’ve deferred your State Pension and you die, your spouse or civil partner may be able to claim an additional State Pension or a lump sum.

Clearwater Financial Planning Limited is an Appointed Representative of Intrinsic Financial Planning Limited, and Intrinsic Mortgage Planning limited which is authorised and regulated by the Financial Conduct Authority.

Intrinsic Financial Planning Limited and Intrinsic Mortgage Planning Limited, are entered on the FCA Register (http://www.fca.org.uk/register/) under reference 440703 and 440718

Clearwater Financial Planning Ltd is Registered in England & Wales Company Number 05764001

Registered Office - 56 Fore Street, Kingsbridge, Devon, TQ7 1NY