One of the reasons people often decide not to pay into a pension, is the thought of losing it all when they die. Indeed, this very question was raised on one of our articles only last week:
“Hi, if I buy a commercial property with my SIPP, who will own the property when I die? I was informed that it would then be transferred to the pension company!!!!! I’m sure that can’t be right, however, I would like to know the best way around this so that it can be either transferred into my ownership once it’s paid for & or could be passed down to my spouse or children.”
So, what does happen to your pension when you die? Does it all go to your pension provider as our reader thought?
The first thing to clear up, is that the type of asset you hold in your pension, makes no difference to what happens to the actual fund on your death.
But, when you die does make a difference.
If you die before retirement
If you have a Personal Pension, Stakeholder Pension, or SIPP (Self-Invested Personal Pension) and you die before you retire, take an income from your pension, or the tax free lump sum, the answer is simple. A lump sum equivalent to the full value of your pension is paid out to your beneficiaries; the great news is that this is paid tax-free. Furthermore, it isn’t included in the value of your estate when calculating whether any Inheritance Tax is due.
However, if you are a member of an Occupational Pension Scheme, the answer is a little more complex. Each scheme is different, although there will usually be a payment of a lump sum, equal to between one and four year’s salary, plus a widow or widowers pension.
If you have this type of pension you should check with the scheme what the exact rules are, of course one of our advisers could do this for you.
Death after retirement
The answer after you have retired is more complex and depends on how you have decided to take an income from your pension. The most popular two options are to buy an Annuity or use Income Drawdown, also known as Capped Drawdown.
If you have bought an Annuity and assuming you have included them as options, the income will continue until the end of the guarantee period or until your spouse dies, whichever is longer.
If you have chosen to use Income Drawdown, your pension fund will have remained invested, perhaps in cash, funds, shares or property. When you die your spouse, or indeed whoever you have nominated as a beneficiary, will have three options:
- To buy an Annuity
- To continue with the Income Drawdown plan, although the level of income will change to reflect their age
- To take a lump sum
If your spouse or beneficiaries decide on an Annuity or Income Drawdown, then the full fund value is used. However, if they take a lump sum a 55% tax charge would be payable.
If you are lucky enough to be a member of a defined benefit or final salary Occupational Pension Scheme, then again the answer is dependent upon the rules of your scheme. However, it is normal for a widow, widower or dependent’s pension to be payable.
All is not lost
So, back to the original question.
Will the pension fund be transferred to the pension company on death of the member? The short answer is no, but exactly what happens depends on when you die and the type of scheme you are in.