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I can’t pass my pension on to my loved ones - fact or fiction?

We bust one of the most common myths about what happens to your pension after you’re gone.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

With pension regulations always changing, it can be hard to sort fact from fiction. Some people might think their pension will be lost when they die, but that’s not the case. What happens to your pension will depend on the type of pension scheme you have, what you do with it, and how old you are when you die. In some cases your loved ones could receive a cash lump sum completely tax free.

This article isn’t personal advice. If you’re not sure, please ask for advice. Pension and tax rules can change and benefits will depend on individual circumstances.

Passing on your pension wealth

If you have a personal pension then your loved ones will usually have two options when it comes to anything that’s left. They could decide to have everything paid to them as a cash lump sum, or they could convert the pension into their own name to provide them with an income. The amount of tax they pay on payments will depend on how old you were when you died – more on this below. All this applies whether or not you’ve accessed your pension flexibly through drawdown or by taking lump sum(s).

If you’ve got a defined benefit scheme, like a final salary pension, it’s a completely different ball game. Your pension will usually pay out to your spouse or financial dependants after you’re gone. But each scheme is different, so make sure you check the benefits with your provider.

Who can benefit?

Pensions fall outside of your estate so aren’t covered by your Will, and won’t usually be liable for inheritance tax. You’ll need to let your pension provider know who you would like to benefit from your pension. If you have an HL SIPP then you can update and amend your beneficiaries online by logging in to your account or by completing and returning an Expression of Wish Form.

It’s important to keep your wishes up to date. Although choosing a beneficiary isn’t legally binding, it will let your pension provider know your wishes, which must be taken into account.

update your beneficiaries

Passing on an annuity

If you’ve used your pension to buy an annuity, or you plan to, the income you receive will stop when you die unless you’ve chosen particular guarantees.

Annuity type Benefit to loved ones
Joint life annuity You choose how much of your annuity income would continue to be paid to your beneficiary if you pass away before your spouse.
Guarantee periods Your income is paid for your lifetime, and is also guaranteed to pay for a minimum length of time. If you die within this time, the income will be paid to your estate or your beneficiaries for the rest of the period.
Value protection Your beneficiaries will receive the original amount you used to buy the annuity, less any income paid, as a lump sum.

More on annuity options

Tax on payments

Before the introduction of pension freedoms your beneficiaries might have faced a 55% tax charge on the pension they inherited. Thankfully, the rules have changed.

Now, if you were to die before age 75 then any money left in your pension can usually be passed on completely tax free (including the income paid from an annuity). If you pass away at or over 75, your beneficiaries will pay income tax on any payments they receive. So large withdrawals could affect their tax situation. This means choosing to spread payments across a number of tax years could help reduce their tax bill.

Remember, pension and tax rules can change and any benefits will depend on individual circumstances.

You can find more information about what happens to your pension when you die in our factsheet.

What help is available?

If you have any questions, call our retirement experts on 0117 980 9940. They’re always happy to help and available six days a week: Monday-Thursday 8am-7pm, Friday 8am-6pm and Saturday 9:30am-12:30pm.

What you do with your pension is an important decision. We strongly recommend you understand all your options and check that the option you choose is right for your circumstances. Take advice or seek guidance if you’re unsure.

The government provides a free and impartial service to help you understand your retirement options - more on Pension Wise. This article isn’t personal advice. We do offer advice if you’d like it.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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