Who gets pension pot when you die?

Provide for loved ones if you go before you can spend it

PENSIONS are still the most effective way of saving for your retirement – and with the success of auto enrolment many more people will be saving through their workplace.

But what happens to these pension savings you’ve built up if you are unlucky enough to die before you are able to use them?

Discussing death and money with your family can be difficult but here, with the help of experts, I explain the different types of pensions and what you need to think about.

This not only depends on the type of pension scheme you have, but also much will depend on what your employer offers.

Andrew Tully, pensions technical director at Canada Life, says: “Pensions can be complicated but it is important to know what type of scheme or pension arrangement you have.

“This can make a significant difference to how your family or dependents are looked after if you die while you are still working or have begun to withdraw your pension.”

TYPES OF PENSIONS

There are essentially two types of pension – final-salary, or definedbenefit, schemes where death benefits are usually a multiple of salary and/or providing a pension for partners. These are often described as the gold standard for pension provision, but are increasingly rare.

And there are defined-contribution schemes (whether workplace or individual) where the pension pot is passed to family.

Defined contribution schemes are used as part of the auto enrolment rollout and are now common, so if you’ve only recently joined a scheme this is likely to be the type you have.

Some people who have a DC scheme may have an employer who pays a defined benefit on their death, for example twice your salary.

FINAL-SALARY PENSIONS

With final-salary pensions, most schemes will pay out a lump sum to a beneficiary (typically your spouse but it may be a child or other dependent) of a multiple of salary (eg two times basic salary). If you die before the age of 75 this is paid tax-free, as long as the scheme pays the money out within two years.

This type of pension will also pay your spouse, civil partner or dependent child an income, usually around

50%.

This is taxed as income and stops when the spouse or inheriting dependent dies. If you’re not married it’s worth checking if your scheme will pay to a cohabitee. Most now will but some schemes will still only pay to a legal spouse or civil partner.

If you have this type of pension, it is vital that you have registered an up-to-date expression-of-wish form.

This helps the trustees of the pension to pay any lump sum to the beneficiary you decide, although who receives the money is normally at the discretion of the trustees. The form also helps avoid unnecessary tax charges.

It is easy to lose track of pensions, so if a spouse or partner wants to check if the deceased had any pension provision they need to contact the pension tracing service.

If you are single, divorced or have no dependent children, then it is worth thinking about what you might want to happen in the event of your death – while there may be no pension payable, a lump sum may still be paid (eg a multiple of your salary) so an expression-of- wish form is arguably even more important in this case.

You can transfer out of the defined benefit arrangement to an individual pension which can provide far greater flexibility and choice in who could potentially inherit the pension. However, this involves a number of risks so you must seek financial advice before doing this.

DEFINEDCONTRIBUTION PENSIONS

The defined-contribution or individual pension, which is now commonplace, is where you have your own ‘pot’ of money which is paid to family following death. However, some employers may still offer a multiple of salary like a finalsalary pension, in addition, if an employee dies.

The pension freedoms have been described as a game changer around how the pension pot is treated on death.

The pot can now be inherited tax-free and cascaded down generations, sometimes free of both income and inheritance tax charges.

Again, it is vital that you complete and keep updated an expression of wish form. This will help the pension provider decide where and who to pay any benefits to, and can speed up things considerably at a very difficult time.

It’s also important you keep this form up to date if personal circumstances change, for example on divorce.

Tax treatment on death with DC pensions depends on whether the policyholder dies before the age of 75 or from 75 onwards. If you are still working this is likely to be before 75 and in that case pensions can be inherited tax-free. If the policyholder dies after 75, any lump sum or income is taxed at the beneficiary’s marginal rate of tax when it is withdrawn from the pension.

In both cases death benefits paid before age 75 – either multiple of salary or from untouched pension savings – count towards the lifetime allowance, currently £1.03million. So for some people who have higher salaries and higher pension savings this could mean a tax charge on benefits in excess of £1.03million.

Andrew Tully adds: “There are some basic rules to follow but the most important thing to remember, whatever type of pension you might have, is to ensure your employer, pension trustee or pension provider has an up-to-date expression-of-wish form.

“Think of this as ‘a will for your pension’, this will ensure the right people receive your pension benefits as quickly as possible.”

■ Pension tracing service: gov.uk/find-pension-contactdetails.

■ Money Advice Service:

moneyadviceservice.org.uk/en ■ Pension Wise: pensionwise.gov. uk/en

Update your expressionof-wish form if things change in your personal life – for example if you divorce