If you have a defined contribution (DC) pension in the UK, it’s essential to understand what happens to your pension savings after you die.
The good news is that the rules for distributing DC pension benefits after death are relatively simple.
Can I control who gets my pension money when I die?
When you die, your pension provider will pay out your pension savings to the people you name as your beneficiaries. If you have not yet named any beneficiaries, the pension provider will use its discretion to decide who receives the money.
What will they get?
Your beneficiaries can choose to receive the pension savings as a lump-sum payment or keep the money in an account they can access at any time. Some older pension plans do not offer this, so you should check whether yours does.
Will they pay any tax?
Your beneficiaries will not have to pay any tax on the money if you die before age 75. If you die after age 75, your beneficiaries will have to pay tax on the money at their marginal income tax rate when they receive it.
What about Inheritance Tax?
One of the key announcements in last year’s Autumn Budget was that starting in April 2027, Inheritance Tax (IHT) will apply to pension assets. If you leave your pension to your spouse or civil partner, they won’t have to pay inheritance tax on it. Dependents’ pension schemes are not included in inheritance tax. If your pension goes to someone else, like your children or grandchildren, the value of your pension will be counted in your estate for inheritance tax calculations. If you die after age 75 and your pension goes to someone who is not your spouse, they may have to pay both income tax on withdrawals and inheritance tax.
What if I want to change who gets my pension on my death?
It’s essential to keep your beneficiaries updated on your pension arrangements, especially if your circumstances change. For example, if you get divorced or remarry, you may want to update your beneficiaries to reflect your new circumstances.
