Many people consider their property to be their most valuable asset, but actually, your pension fund might be worth more.
Have you considered what will happen to your pension fund when you die?
This will largely depend upon the type of pension that you have and whether you’ve already started to draw a pension income from it.
Before Retirement
If you have a final salary pension and have not yet taken any benefits from the scheme, it’s likely that the pension scheme will provide a pension for your spouse, civil partner or other dependent in the event of your death.
Quite often, this will be at a rate of 50% or 66% of your pension entitlement as at the date of your death*.
*Each scheme will have it's own rules.
This pension death benefit will then be paid to your dependent(s) for the rest of their life, or for the duration of their dependency e.g. until they’ve finished full-time education if they are a dependent child.
If you have a personal pension plan, group personal pension or group money purchase occupational pension, in the event of your death before retirement (and before age 75) the full value of those plans will pass to your nominated beneficiary free of tax. If the scheme facilitates beneficiary drawdown*, your beneficiary can withdraw from the inherited pension fund as required, regardless of their age. Your selected beneficiaries can be anyone, they do not have to be related to you, nor dependent on you, and you can even leave your pension fund to a charity.
*It's always best to seek independent advice from a financial adviser to establish the death benefit options under your pension arrangements, as they may not always be most appropriate to your circumstances and requirements.
After Retirement
If you’ve started to draw a pension from a final salary pension scheme, it will usually provide a guarantee period (often 5 years). This means that if you were to die within that guarantee period, the remainder of that period's pension income would be paid to your beneficiary.
In addition, under a final salary pension scheme, a spouse’s, civil partner’s or dependent’s pension is usually provided. This is is likely to be at a rate of 50% or 66% of your pension entitlement from the scheme* and will be paid to your dependent for the rest of their life, or the duration of their dependency.
*Each scheme will have it's own rules.
If you have a personal pension, group personal pension or group money purchase occupational pension, death benefits during retirement will depend on how you have chosen to take benefits from the scheme.
If you’ve used your fund to purchase an annuity, death benefits will depend on the options selected at outset. For example, you may have chosen to include a dependent’s pension at a rate of 100%, 66%, 50% or 33%, and you may have selected a guarantee period. The options you’ve selected will determine what gets paid to your dependents on your death.
Under an alternative option, if you’ve used your pension fund to enter Flexi Access Drawdown, the value of your residual fund on your death will pass to your nominated beneficiary. Your beneficiary does not have to be a dependent. If you pass away before age 75, the fund can be drawn on by your beneficiaries without being subject to Income Tax. Whereas, if you are over the age of 75 when you pass away, anything that your beneficiaries draw out of the inherited pension fund will be subject to Income Tax at their marginal rate.
It's important to note that most personal pensions are not subject to Inheritance Tax on death, so are a tax-efficient way of passing wealth on to future generations.
If you need any advice in respect of your existing pensions, or an understanding what would happen to them in the event of you passing, please get in touch for a financial review.
Charlotte Owen
Independent Financial Adviser
c.owen@grosvenorconsultancy.co.uk
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