One of the most common questions we get asked here at Reeves Independent by clients is what happens to my pension when I die?
There are of course a number of different scenarios when answering the above question. One thing is for sure is that the new rules since April 2015 now make it possible to pass pensions on to loved ones in a more tax-efficient manner.
If you’ve money in your pension but you haven’t retired
If you die before you take anything from your pension, it will usually be paid as a lump sum to your beneficiaries tax-free.
As long as it is less than the lifetime allowance (£1.25million in tax year 2015/16) it will be paid tax-free, unless you die at age 75 or older.
The Government has announced changes to the way death benefits from pensions are taxed:
- If you die before age 75 – your pension can be paid to your beneficiaries tax-free, either as a lump sum, an annuity, or through flexible drawdown.
- If you die age 75 or older – your pension can be paid as a lump sum which will initially be taxed at 45%. Or your beneficiaries can use flexible drawdown and will then only pay tax at their marginal rate.
There will normally be no inheritance tax to pay.
If you’ve money left in flexible drawdown
If you die before age 75 with your money in flexible drawdown your spouse, partner, dependant or beneficiary can:
- Stay in the flexible drawdown plan and take income tax-free
- Take the pension as a lump sum tax-free
- Buy an annuity, where income will be paid tax-free
If you die after age 75 with your money in flexible drawdown your spouse, partner, dependant or beneficiary can
- Stay in the flexible drawdown plan and take income subject to tax at their marginal rate
- Take the pension as a lump sum tax-free which will be taxed at 45%
- Buy an annuity, where income will be subject to tax at their marginal rate
If you have an annuity
If you chose a guaranteed period and die within this period then the annuity will continue to be paid until the end of the guaranteed period.
If you bought a joint life annuity the annuity payments will continue to be paid to the second person, at the level you chose, until they die. If you die before age 75 the annuity payments paid will be tax-free, if you die after age 75 then any payments will be taxed as income at their marginal rate.
In all other cases your money dies with you so no further payments are made.*
Speaking to someone to ensure your loved ones don’t lose out after your death easy with Reeves Independent, just use our contact form or call us on 0191 281 9862 for a FREE initial conversation!
* Scottish Widows Fact Sheet – http://www.scottishwidows.co.uk/retirement-planning/retirement-explained/pension-tax/inheritance/index.html