Pension Death Benefits
Do you know what happens to your pension pot when you die?
A positive from this situation is that your pension savings can be passed on to your beneficiaries. Whether this is your spouse, children or anybody else you wish to receive the money. You can choose to share this money amongst several people or maybe leave all of your pot to just one lucky person.
The decision is yours. However, you must make your decision clear whilst you’re still alive. One way of doing this is by completing an ‘expression of wishes’ form with your pension provider. This form allows you to nominate your proposed beneficiaries.
Options the beneficiaries have with an inherited pension pot:
1. Take the pot as a cash lump sum
2. Buy a guaranteed income (Annuity)
3. Take flexible income from the pot (Flexi-Access Drawdown) as and when they need it
4. Leave it and pass it on to someone else when they die
5. Or choose a combination of these options
Will my pension pot get taxed on my death?
Whatever the value of your pension pot the monies are outside of your estate for inheritance tax purposes, however the tax position for your beneficiaries all depends on the age you die.
If you die before the age of 75, the money your beneficiaries receive whether as a lump sum or income is normally tax free regardless of their age.
However, there is potential for tax if you die after the age of 75. Any money received as a lump sum or income will be added to their income for that tax year. This is treated just as your salary or wage would be.
Another note worth adding is that any pension pot over £1 million regardless of what age you die will be liable for tax.
As you can see, pension freedom rules have allowed a flexible way for you to save when you’re alive as well as being a flexible savings vehicle for your beneficiaries.