What happens to my pension savings when I die? Your questions: answered

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We’ve noticed a lot of people have questions about what happens to their pension when they die – so our retirement expert Sean Young is here again to answer some of the most common ones.

So, Sean, what happens to our pension savings when we die?

First, let me clarify: they certainly don't get kept by your pension provider, which I think is a common misconception. 

Most pensions are set up so that your pension provider (or pension trustees – people who help with the running of pension schemes) ultimately decide who your pension savings go to. But don’t worry – you still get to have a say by naming beneficiaries. 

To start with, we’ll have a look at your plan to see if you have named any beneficiaries. If you have, we’ll consider them first. If not, we’ll speak to the people in your life to find out if anyone was financially dependent on you, or who they think you’d have wanted your savings to go to. 

From there, your beneficiaries can take your pension savings as a lump sum. Or they can take them as a guaranteed income for life (an annuity) or set up a flexible retirement income (drawdown), which you can read more about in our article. Your pension savings would stay separate to their own pension savings, though. 

How are my pension savings taxed when I die?

Essentially, this all depends on the age you are when you die. If you die before age 75, then any pension savings up to the amount of £1,073,100 are usually passed over to your beneficiaries completely tax free. Anything over this amount would be taxed at the beneficiary’s usual rate of income tax.

If you die after age 75, then your whole pension pot will be taxed at the beneficiary’s usual rate of income tax. 

Who can be nominated as a pension beneficiary?

It’s really up to you. You can, of course, nominate your spouse, your partner, your children, your grandchildren, or any other living family members. You can also nominate friends or even a charity if you’d prefer. You can also decide how many beneficiaries to have and how much each person should get as a percentage, so you could have a mix of these options as well.

Can I pass my pension savings to a child?

Yes, you can. However, if you pass your pension savings to someone under the age of 16, we’d pay them to the child’s legal guardian on their behalf.

Is it normal for a beneficiary form to say that the provider isn’t obligated to follow your wishes?

Yes, it is. Although your pension provider will try to follow your wishes as much as possible. 

The reason this is mentioned in the form is because it isn’t a legally binding document. This can be a good thing though; people and families can change over time and if your beneficiaries aren’t kept up to date regularly, you might find some important people are left out. 

Say, for example, you had children from a previous marriage and put them down as your beneficiaries. But then, later on in life, you have children with a new partner and forget to update your beneficiaries. Your younger children could come forward after your death and contest the decision. And because the document isn’t legally binding, we have the flexibility to include them and make sure all of your dependants are taken care of. So we need to have that wiggle room, just in case.

If you really wanted to be 100% certain that your pension savings would go to the people you nominate, you could consider something called a bypass trust. This basically would mean you’d write your pension death benefits into a trust which would be legally binding, and your provider would need to follow those instructions. They’d have to make any payment to the trustees, who would then distribute it to your chosen beneficiaries. 

There are pros and cons to this option – including significant tax charges if you were to die over the age of 75 – so chat it though with a financial adviser if you’re not sure.

Can my pension be allocated to beneficiaries in my will?

Typically, pension plans aren’t included as part of your estate when you die, so they aren’t covered by your will. The positive here is that it means your pension isn’t liable for inheritance tax. The fact that it’s not usually covered in your will means that, ultimately, your pension provider will make the final decision.

Still have questions?

If you’ve still got some questions about passing on your pension, you can read Can you leave your pension savings to your loved ones?

And don’t forget to nominate a beneficiary on your plan, or check in on your original choices to make sure they’re still up to date. You can usually do this online, or you can get in touch with us if you’d prefer.

 

The information here is based on our understanding in April 2024 and shouldn’t be taken as financial advice.

Your own personal circumstances, including where you live in the UK will have an impact on the tax you pay. Laws and tax rules may change in the future.

A pension is an investment and its value can go down as well as up and may be worth less than was paid in.

Standard Life accepts no responsibility for information in external websites. These are provided for general information.