What happens to my pension when I die?

Discussing what happens to your pension after you pass away isn’t a topic many of us rush to think about. However, understanding this could not only offer you peace of mind but also ensure your loved ones are taken care of financially.

Your Pension’s Destiny

Under the rules that apply before 6 April 2027, unused defined contribution pension funds and death benefits are generally outside the estate for Inheritance Tax where the scheme provider has discretion over who receives them. Income Tax can still apply to beneficiaries.

Inheritance Tax changes from 6 April 2027

From 6 April 2027, most unused pension funds and pension death benefits will generally be included in the estate for Inheritance Tax. Exemptions and exclusions apply, including transfers to a spouse or civil partner, charity exemptions and death-in-service benefits. A beneficiary’s Income Tax position is separate, so consider regulated advice for your circumstances.

Choice for Beneficiaries

Those you nominate as beneficiaries have a choice in how they receive their share of your pension. They can either take it as a lump sum or decide to keep it invested in a pension scheme to potentially grow over time. Keeping the pension invested allows them to withdraw income as needed, continuing to benefit from the pension’s tax-efficient status.

Who Can You Nominate?

You have the freedom to nominate anyone to be your beneficiary – from your spouse or civil partner to children, grandchildren, or even someone unrelated. It’s important to consider who you think will benefit most from this.

Tax Implications

It’s worth noting that your beneficiaries might need to pay income tax on the pension money they receive, depending on certain factors. Generally, if you die before the age of 75, no income tax will be charged on the pension funds received.

Making It Official

You can easily record your beneficiary in the Penny app. It’s quick, straightforward, and ensures that your wishes are clear.