Can you leave your pension savings to your loved ones?

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Pension rules now make it possible to pass your pension plan on to your loved ones without paying the previous 55% ‘death tax’. These basic checks and steps can normally make sure your pension savings go to the right people in a tax-efficient way.

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Many people want to leave their assets to their children or other loved ones, and passing on your pension plan is now one of the most tax-efficient ways to do this. This is because your pension savings aren’t normally considered part of your estate, so they could be exempt from inheritance tax. In the past, a death tax of up to 55% was applied instead, but this was scrapped in 2014.

So, how can you make sure your loved ones benefit from your pension?

There are a few key steps you can take to help you feel confident that your pension savings will go to the right people in the right way. Here’s what to do:

1. Make sure your pension offers death benefits

A death benefit is the money that is paid out after your death. Most pension plans will allow you to nominate whoever you want to inherit your pension savings when you die. They’ll also offer those who benefit a range of options when it comes to how to take the money. However, not all pensions are the same. For example, most annuities (a guaranteed income for life) will stop paying income when you die and you won’t be able to pass it on, unless it’s on a joint life basis or has a guarantee period. So an important first step is to check with your provider if your pension offers what you need. 

If you find that your current pension plan doesn't offer the flexibility you'd like, you might have the option to transfer it to a different type of plan or even another provider. But not all plans will allow this and transferring won't be right for everyone. 

For example, your pension plan might have valuable guarantees or benefits that you don't want to lose. Some ‘defined benefit’ or ‘final salary’ pensions entitle you to a certain level of income in your retirement. Or older pension plans may have valuable guaranteed annuity rates. If you're unsure you should consider getting financial advice. 

2. Tell your pension provider who you want your pension to go to

While there can be practical, financial and emotional benefits to making a will, what people don't always realise is that your will doesn't usually control who inherits your pension savings.

Your pension provider or trustees will ultimately decide where your pension savings go. They will take into account your wishes if you have specified the people and causes (or 'beneficiaries') that you want to receive it, but they aren’t bound by them. So make sure they’re named.

Most modern pension plans will allow you to say which people or causes you'd like your money to go to when you die. But check with your provider or employer because the process for naming your beneficiaries can vary.

You may need to request a beneficiary nomination form from your pension provider. Or you may be able to name and update beneficiaries online, as you can with most Standard Life pensions. You can find out more about our online services on our website, or visit our support page for FAQs and ways to get in touch.

3. Regularly review your beneficiaries

Once you've nominated your beneficiaries - don't just stop there and forget about it. It's important to review them regularly and update when necessary.

Wishes and plans change, especially after big life changes like the birth of children or grandchildren, marriages and divorces. If you don't keep all your pension plans up to date as your circumstances change, you risk your pension savings not going to the right people if you die.

4. Consider the tax they’ll pay when they receive your pension

Pensions can be a tax-efficient way of passing on your wealth because they aren't part of your taxable estate, so inheritance tax doesn't usually apply. But other taxes, such as income tax, may apply. 

If you die before the age of 75, your beneficiaries will normally inherit your pension pot tax-free. If you die after the age of 75, then your beneficiaries will pay income tax on anything they withdraw from your pension savings.

The amount of tax that needs paid on your pension savings will depend on your individual circumstances and that of your beneficiaries, including the type of pension you have. Tax and legislation may change and your own individual circumstances, including where you live in the UK, will have an impact on your tax treatment.

A pension is an investment. Its value can go down as well as up and you could get back less than what was paid in.

It's an important decision, so if you're unsure it could be worth getting financial advice. If you don't already have a financial adviser you can find one in your area at Unbiased.co.uk. You can check if an adviser has been authorised by the Financial Conduct Authority (FCA) on FCA.org.uk. 

The information here is based on our understanding in September 2023 and shouldn't be taken as financial advice.