What happens to someone’s pension after they die depends on multiple factors, such as how old the person was when they died and the type of pension they held. In this article,
we'll explain how to deal with a pension after the pension holder dies, and whether
surviving relatives may be entitled to receive payments.
If the deceased person was still paying into a pension when they died, then the pension scheme provider will probably want to see an original death certificate before making any payments. It’s a good idea to obtain multiple official copies of the death certificate to send out to different companies when a person dies, so as to avoid any delays.
If the deceased was receiving a State Pension at the time of their death, you should contact the Department of Work and Pensions immediately to inform them of the death,
so they can stop making payments.
The deceased’s surviving spouse or civil partner may be entitled to extra payments from the deceased’s State Pension. This depends on the amount of National Insurance contributions they made and when each of them reached State Pension age.
The Pension Service will confirm the position after you have provided all of the relevant information to them. This can be done when you contact them to inform them of the death.
Personal and Workplace Pensions
When dealing with a person’s affairs after they die, you should look through their paperwork to check whether they had any personal or workplace pension schemes. If they did then you will need to contact the pension provider to find out how much the deceased had in their pension scheme. The pension provider will also be able to advise you on what to do next.
Defined Benefit Pensions
The way in which defined benefit pensions work depends on whether the deceased was retired when he or she passed away.
If the deceased was not retired:
- Most schemes will pay out a lump sum on death. This would usually be between two to four times their annual salary.
- The lump sum is usually tax-free if the deceased was under 75 (see further information about lump sum payments below).
- In addition, what’s known as a ‘survivor’s pension’ is usually also payable to the deceased’s spouse, civil partner or dependent child.
If the deceased was retired:
- A reduced pension will often continue to be paid to a spouse, civil partner or other dependent until they die.
The exact benefits vary from scheme to scheme. You can check what benefits are due by contacting the deceased's pension provider.
Defined Contribution Pensions
Defined contribution pensions are subject to different tax rules than other pension schemes. What happens with a defined contribution pension will depend on whether or not the deceased died before or after they turned 75 years of age.
If the deceased died before their 75th birthday:
Income from a single pension will stop unless there was a 'guaranteed period'. If there is a guaranteed period, the pension will be paid to the Beneficiaries until the end of that period and income tax will apply to those payments.
With joint pensions, income will continue to be paid to the surviving person (if applicable) until their death; usually at a reduced rate. This will be tax-free.
If the deceased has a ‘flexi access drawdown pension’ that they set up or first accessed after 5 April 2015 then any money paid within two years of their death will be paid tax-free.
- If the pension is claimed more than two years after the deceased’s death, tax might be payable.
If the deceased died after their 75th birthday:
- Income from a single pension will stop unless there was a ‘guaranteed period’. If this is the case, it will be paid to the Beneficiaries until the end of that period and income tax will apply to those payments.
- Income from a joint pension will continue to be paid to the survivor and income tax will apply.
If a lump sum is payable from a defined benefit pension scheme, the scheme provider may pay this to a specific person (or people). This will be the case if the deceased nominated one or more Beneficiaries or completed an 'expression of wish' form during their lifetime, naming who they wanted to benefit from the payment.
If no Beneficiaries have been named and no 'expression of wish' was made, the pension scheme provider will decide who will receive any lump sum and survivor pension. This is usually decided after the next of kin has completed a claim form providing details of the deceased's family and any dependents they had.
The advantage of this type of payment is that it will go directly from the pension scheme to the deceased's family, without becoming part of their Estate. This means that the payments are not normally subject to Inheritance Tax and can be dealt with more quickly than the deceased's other assets, such as property.
If the deceased did not name any Beneficiaries, did not complete an 'expression of wish' form and did not have any dependents, the lump sum will usually end up being paid to the deceased's Estate. It could then be liable for Inheritance Tax (depending on the value of the overall Estate) and will be passed on according to the deceased's Will or the Rules of Intestacy if no Will was left.
If all of the deceased's pension savings add up to more than the 'lifetime allowance' tax may be payable on the pension savings that are inherited by the Beneficiaries.
The lifetime allowance limit is currently £1 million.
For initial advice and guidance call Co-op Legal Services on 03306069591 or contact us online and we will help you.