Pension death benefits

As we go through life, it’s crucial to plan for the future. Death benefits are payments that your loved ones may receive from your pension when you die.

PensionBee’s death benefits

PensionBee offers death benefits with all our pensions free of charge, meaning that when you pass away your beneficiaries may claim your full remaining pension savings - though they may incur a tax charge. To claim these benefits, your loved ones will need to send us a copy of your death certificate.

After confirmation of death, the process to review beneficiaries begins. You may not be aware that your nominated pension beneficiaries provide guidance as to who benefits should be paid to, but aren’t legally binding. In fact the final decision on who receives your remaining pension pot rests with the pension provider managing your savings. In the process of identifying potential beneficiaries, your provider will review your nominated beneficiaries and ask for further documentation to help make their decision.

It’s important to let your loved ones know that you have a pension with us and to give them the details of your plan. This will help them to claim your death benefits when you die. If your loved ones don’t claim your death benefits within a certain time period (currently set at two years), they may lose the right to receive them. We may need to ask your family, friends, or other people for information to help us identify your potential beneficiaries.

What are pension beneficiaries?

Beneficiaries are people or organisations that you choose to receive the benefits from your pension plan after you die. You can usually nominate your beneficiaries with your pension provider. The tax treatment of pension benefits paid to beneficiaries depends on the type of pension plan and the age of the beneficiary.

You can usually choose any beneficiary you want for your death benefit pension policy. This might be your spouse, civil partner, or children. But it can also be a friend, relative, or charity. There are two main types of pension, defined contribution and defined benefit. The type you have will determine how much of your pension your beneficiaries can claim, and when they can claim, following the death.

If you don’t nominate any beneficiaries, or if your nominated beneficiaries die before you, your pension provider will use its discretion to decide who should receive your benefits. Pension beneficiaries can usually choose between receiving their benefits as a lump sum, an annuity (a guaranteed income for either a set number of years or your lifetime), or a combination of both.

Pension beneficiary rules

Your ‘estate’ is a term used to describe everything you own, plus everything you owe. 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 2024/25 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.

Pension death benefits

When someone dies with money in a pension scheme, the pension provider will need to decide who gets the death benefits. If the deceased filled out a form or wrote a letter of wishes, this can help the decision-making process. For certain pension schemes, the death benefits are paid directly to the beneficiaries which can have tax consequences for the recipients.

There are different options for how the benefits can be provided to beneficiaries, such as:

  • lump sum;
  • income drawdown;
  • lifetime annuity; or
  • dependant’s scheme pension.

Individuals can choose between these options, while charities and trusts can only receive lump sums.

Not all schemes allow income drawdown or a dependant’s scheme pension. If there is no nomination, non-dependants may have limited options. Survivors may receive other death benefits that they have less control over, such as ongoing annuity payments or benefits paid under guarantee periods or value protection. There are rules for death benefits from contracted-out rights.

When it comes to pensions, there are several options available to beneficiaries after the death of the pension holder. Here’s a breakdown of payout options.

Lump sum

One of the most common options is a lump sum payment, which is a one-time payment made to the beneficiaries. This can be helpful for paying for funeral costs or other debts, but it’s important to note that lump sums are often taxed at the marginal rate, which means that beneficiaries may not receive the full amount.

Income drawdown

Another option is income drawdown, which allows beneficiaries to have more flexibility and control over how they withdraw the money. This means that they can choose how much they withdraw and when, but it’s important to note that the money will eventually run out and there are no guarantees.

Lifetime annuity

A lifetime annuity guarantees a regular income for life. This can be beneficial for beneficiaries who want the security of a steady income stream, but it’s important to note that annuities are complex products and might not withstand inflation. An annuity can pay a level, increasing, or decreasing income over time.

Scheme pension

Lastly, there’s a dependant’s pension scheme, which provides a regular income to the surviving spouse or civil partner until they die or remarry. It’s important to note that this option is only available in some pension schemes. Only dependents of the member can receive it, and they can often choose an annuity instead.

Alternatives to pension death benefit policies

While pension death benefit policies offer advantages, they may not be the right choice for everyone. Life insurance can provide a financial cushion for those you love in case of unexpected circumstances. It’s like a shield that protects your family from worrying about mortgage payments or other financial commitments.

Life insurance comes in various forms, with the most well-known being a policy that pays out a cash lump sum to your chosen beneficiaries if you pass away during the policy term. But there are other options, too, such as mortgage life insurance, family life insurance, and over 50s life insurance.

In addition to these, there are also products like income protection, which ensures that you’ll still receive an income if you become sick or injured. Critical illness cover is another option and provides a lump sum to support your family if you’re diagnosed with a life-changing illness. If you’re interested in learning more about life insurance, check out LifeSearch.

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: 06-04-2024

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