Skipton Financial Services
Monday, February 1, 2016 - 14:37

What happens if I die before retirement?

There is a cruelty to the fact some people who save into a pension won’t live long enough to enjoy it – but the good news is that loved ones can still benefit from this pot of money.

Most pension funds can be passed on to your loved ones as a lump sum, tax-free (provided they are nominated as a beneficiary, and the owner is under 75). It also wouldn’t be included as part of your estate when it comes to determining if you have an Inheritance Tax liability. 

There are, as ever, certain caveats to this:

  • If your pension savings are above your lifetime allowance (£1 million from April 2016) your beneficiaries would have to pay tax on the amount above it. That would equate to a 55% tax charge to inherit any pension pot in excess of the Life Time Allowance as a lump sum, or a 25% tax charge on the excess if your beneficiaries draw  the pot as an income.
  • If you are aged 75 or over when you die, your beneficiaries will have to pay income tax at their marginal rate to inherit your pension (unless you die before April 2016, where a 45% tax rate will apply if taken as a lump sum). This rule applies regardless of whether you have started to use your pension or kept it untouched. 

State pension

If you die between the age of 45 and state pension age, your spouse might be entitled to claim Bereavement Allowance and a one-off Bereavement Payment. 

Bereavement Allowance:

  • The amount they receive will depend on your National Insurance Contribution record, and the age your partner was when you died. 
  • It would be paid in weekly instalments, for a maximum of 52 weeks from the date you died.
  • They won’t be entitled to receive this allowance if they remarry or form a new civil partnership, live with another person as if they’re married/in a civil partnership, or if they were divorced from you. 
  • If your partner was over state pension age when you die, or if they are raising children, they wouldn’t be entitled to this allowance – but might be entitled to other allowances (such as Widowed Parent’s Allowance). 

Bereavement Payment:

  • This is a one-off, tax-free lump sum of £2,000 your spouse might be able to claim when you die.

  • To receive this payment, your partner must be under state pension age when you die; and you must have either paid National Insurance Contributions, or have died as a result of an industrial accident or disease.  

  • They won’t be entitled to receive this payment if they remarry or form a new civil partnership, live with another person as if they’re married/in a civil partnership, or if they were divorced from you.

The tax treatment of your investments depends on your individual circumstances and prevailing legislation, both of which may change in the future.

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