What happens to your pension when you pass away depends on the type of pension you have:
- State Pension: The UK State Pension stops when you die. However, your spouse or civil partner may be eligible to inherit some of your State Pension benefits, depending on your contributions and the rules at the time of your death.
- Defined Contribution Pensions: The money in your pension pot can be passed on to your beneficiaries. If you die before age 75, your beneficiaries can usually inherit the pension tax-free, whether taken as a lump sum, regular income, or kept invested. If you die after age 75, the inherited pension will be taxed as income when it is withdrawn by your beneficiaries. Starting from April 2027, unused pension funds and death benefits will be considered part of your estate for Inheritance Tax (IHT) purposes, potentially increasing the tax liability for your beneficiaries.
- Defined Benefit Pensions (Final Salary Pensions): These schemes typically provide a reduced pension or lump-sum payment to a spouse, civil partner, or dependent. The specifics vary between pension schemes, so it’s essential to check the terms of your plan.
- Inheritance Tax: Currently, most pension assets are not subject to IHT. However, from April 2027, most unused pension funds will be included in the value of your estate for IHT purposes. This change means that if your estate exceeds the IHT threshold, which is £325,000 as of the 2024/25 tax year, the amount above this threshold may be taxed at 40%.
Extra Considerations:
- Estate Planning: With the upcoming changes, reviewing your estate plan is crucial to understand how it might affect your beneficiaries.
- Beneficiary Nominations: Ensure your pension provider has up-to-date beneficiary nominations.
- Financial Advice: Consulting a financial adviser is advisable to explore strategies that may help mitigate the impact of these tax changes.
The value of pensions can fall as well as rise, you may get back less than you invested.
