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What happens to your pension when you die

Since April 2015, pensions have become more flexible than ever before including significant changes to the tax treatment of remaining pensions on death.

Free factsheet download

There is now more choice and more freedom for passing on pensions to loved ones. But more choice means more difficult decisions; especially if the decisions you make now could affect your loved ones after you’re gone. Below we explain the factors to consider when making a decision and the options available to you and your beneficiaries.

Free factsheet download: What happens to your pension when you die
  • How pension wealth can be passed on to loved ones on death
  • How those with joint life annuities could benefit
  • What choices your beneficiaries might have

What happens to your pension when you die, and the options available to your beneficiaries, will depend on how you take your pension and at what age you die. Investors should remember to plan for the future and ensure their income will sustain their retirement.

Remember your circumstances, and those of your loved ones, can change as you get older, particularly due to health and care needs. For those who have dependants to think about this may play an important role when deciding how to access a pension.

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Tax on flexible income

Drawdown and lump sum withdrawals

Drawdown allows you to retain control of your pension by keeping it invested, and usually take up to 25% of the pension as a tax-free lump sum up front. There is no limit on the subsequent drawdown income that can be taken, but it is taxable.

The tax-free cash taken is yours to save or spend as you choose. Some savvy investors may choose to keep some of the cash as a buffer for income during volatile markets, others may use it for one-off expenditures such as a family wedding or house purchase.

Alternatively, unlimited lump sum withdrawals (also known as an Uncrystallised Funds Pension Lump Sum) can be taken directly from your pension. 25% of each withdrawal should be tax free, and the rest is taxable. As with drawdown, income is not guaranteed. You control and must review where your pension is invested, and how much income you draw. Your income is not secure and it could reduce, or even run out, if investments don't perform as you hoped, you withdraw too much or you live longer than expected.

Any funds left when you die can be taken by your beneficiaries as a one-off lump sum or in stages as income. The tax treatment will depend on the age at which you die (which is explained below).

How can your pension be passed on? If you die before age 75 If you die age 75 or older
As a one-off lump sum Free of income tax Taxed as income*
As income** - via an annuity or drawdown Free of income tax Taxed as income*

*Income is taxed at the beneficiary’s/beneficiaries’ rate of income tax.

**Option only available to dependants or nominated beneficiaries.

The significance of reaching age 75

Prior to 6 April 2015, a massive 55% tax charge could be applied if you died having reached age 75 or when in drawdown.

Now it doesn’t matter if you move the pension into drawdown or take a lump sum, and there’s no need to worry about that 55% tax charge.

If you die before reaching age 75 the remaining money can be passed on tax free. Even if you die after age 75, your beneficiaries will in most cases just pay income tax on the money they receive.

Our factsheet explains the rules in plain-English:

Download our factsheet: find out more about your beneficiaries’ choices

Tax on annuity income

What about annuities?

An annuity is a secure regular income purchased from an insurance company in exchange for part or all of your pension. Usually up to 25% of the pension can be taken first as a tax-free lump sum. The remainder purchases the annuity which pays a guaranteed income for life, which is taxable.

Please note: Once set up an annuity cannot normally be changed or cancelled, so it's important to choose your options carefully.

Options to protect your annuity income:

The income will stop on your death unless you choose one, or a combination of, the below features when you originally set up your annuity.

  1. Choose a joint life annuity

    Income will continue to be paid to your beneficiary if they outlive you.

  2. Choose a guarantee period

    Income is guaranteed for a set number of years. If you die before this period ends, income will continue to be paid for the period to your beneficiary or estate.

  3. Choose to build in annuity protection lump sum (also known as value protection)

    On death the purchase price of the annuity, less income already paid, can be paid out as a lump sum.

As above, the amount of tax your beneficiaries pay will depend on the age you die; if you die before age 75 any continuing income payments or lump sums are usually tax free, and if after age 75 the beneficiaries will pay income tax on the money they receive.

Download our factsheet: find out more about your beneficiaries’ choices

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Nominating beneficiaries and other important considerations

Nominating beneficiaries

In order to ensure your wishes are clear, pension providers may ask you to nominate your chosen beneficiaries. In the HL SIPP (Self Invested Personal Pension), investors are encouraged to complete an Expression of Wish form allowing them to nominate the person or people to whom they would like their SIPP fund paid after their death. This is not legally binding, but gives an indication of their wishes, and can be changed at any point.

Other important considerations

In most cases pensions are free of inheritance tax (IHT) as they are typically held in trust outside your estate. Pension contributions made while in ill health or within two years of death may still be liable to IHT. HMRC require benefits from a pension to be set up within two years of the pension provider becoming aware of the investor’s death for them to remain tax-free, where applicable. Tax charges may also apply if you exceed the lifetime allowance and die before age 75. Pension and tax rules can change and benefits depend on circumstances.

Free factsheet download: what happens to your pension when you die

What help is available?

What you do with your pension is an important decision. Therefore, we strongly recommend you understand your options and check your chosen option is suitable for your circumstances: take appropriate advice or guidance if you are at all unsure.

Pension Wise, the government's pension guidance service, provides a free impartial service to help you understand your options at retirement – more on Pension Wise.

Options at retirementFind out how to maximise the income you receive from your pension fund with this comprehensive guide to your options at retirement. Download your guide

Important information

This article, our guides and online tools, are not personal advice. We offer a range of information and support to help you plan your own finances. We also have an award-winning team of Financial Advisers who can help you achieve your goals. Our flexible approach means you only pay for the advice you need.

If you have any questions, please call our experienced Retirement Helpdesk on 0117 980 9940 (Monday to Thursday 8am - 7pm, Friday 8am - 6pm and Saturday 9:30am - 12:30pm), you will speak to a real person who will answer your questions in plain English.