Pension beneficiary rules
When you pass away your financial assets and personal belongings go to your beneficiaries and there may be inheritance tax due on some parts of your estate. The amount of inheritance tax collected by the government will vary depending on the total value of your estate and who your beneficiaries are. The standard threshold for inheritance tax is £325,000 in the 2023/24 tax year, so if your assets aren’t worth more than this inheritance tax won’t be charged.
Pensions aren’t considered to be part of your estate. For this reason pensions are a great way of leaving money to your loved ones while ensuring they can keep as much of it as possible. Some conditions will apply depending on how old you are when you die and the type of pension you have in place. Here’s some scenarios based on whether you have a defined contribution or defined benefit pension:
Defined contribution
If you die before age 75 and haven’t touched your pension, your beneficiaries have two years to claim your entire pot tax free.
If you die before age 75, and have already started accessing your pension via drawdown, it’s possible for your beneficiaries to access your pot as a tax-free lump sum or sometimes to receive regular drawdown payments tax-free.
If you’re older than 75 when you die, your defined contribution pension won’t be subject to inheritance tax, however your beneficiaries will have to pay income tax at their usual rate.
Defined benefit
If you die before age 75, and haven’t touched your pension, your beneficiaries will usually receive a tax-free lump sum. Your pension may pay out a lump sum worth two to four times your salary. Check with your scheme administrator for more details.
If you’re older than 75 when you die, it’s likely that your spouse, civil partner or dependant will receive a portion of your pension, however this may be subject to tax charges.
Nominating pension beneficiaries
You can nominate your pension beneficiaries with your pension provider. Beneficiaries can be anyone: a friend, a partner, a relative, even a charity. However, your provider isn’t legally obliged to accept your request, although they should take it into consideration upon learning you have passed away. Nominating beneficiaries for your pension can help ensure your loved ones inherit your money and your wishes are carried out.
Managing your beneficiaries
Here are some ways to make managing your beneficiaries simple:
Choose your beneficiaries. Tell your pension providers who should inherit your pension in the event of your death. This removes any ambiguity about what your wishes are and how best your pension provider can honour them.
Consolidate your pensions. Having one pension pot removes the unnecessary burden of contacting multiple pension providers from your grieving loved ones. It also makes reviewing and regularly updating your beneficiaries’ details easier.
Create a will. It’s not essential to have a will for your beneficiaries to receive your pension, but drawing one up can eliminate any doubt over your wishes.
Easily add beneficiaries with PensionBee
PensionBee customers can easily add beneficiaries by heading to the ‘account’ section of their BeeHive. Simply fill in some details about your chosen people or charities (or a combination) that you’d like to receive a portion of your pension when you die.
You can spread it across different beneficiaries and customise the proportion of your pension that goes to each, in the form of a percentage. Should you die and your beneficiaries notify us, we can begin the inheritance procedure for them.
Example: Sarah chooses to leave 45% of her pension to her daughter and another 45% to her best friend, with the remaining 10% going to Cancer Research UK. If she had a pension pot worth £100,000 this would equal £45,000 each for her daughter and friend, and a £10,000 gift to her favourite charity.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 06-04-2023
