Many pension schemes pay benefits following a member's death. This could be a lump sum, a pension paid to a dependant or a mixture of both. The type and amount of benefit paid normally depends on if you die before or after starting your pension.
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Your scheme will probably pay a lump sum. It may also pay a dependants' pension.
A defined benefits pension scheme will often pay a lump sum and a dependant's pension. Company pension schemes that provide money purchase pensions will usually pay a lump sum but may not pay a dependant's pension.
Personal pension schemes will normally only pay the value of your pension pot as a lump sum and not pay a dependant's pension.
If you have pension savings in a company pension scheme but you no longer work for the employer the scheme may only pay a refund of your pension contributions.
Contact your scheme administrator to find out what benefits your pension scheme will pay.
The benefits payable will depend on the type of pension scheme and the choices you made when you started your pension.
The benefits that may be paid will be defined by the pension scheme rules. Check with your scheme administrator to find out what your scheme provides.
This type of scheme can guarantee to pay you a pension for up to ten years. If you die before the end of the guarantee period any remaining payments will be paid to your estate.
A defined benefits scheme will often pay a dependant's pension that is a fraction, for example half or two thirds, of the pension you were receiving when you died.
The benefits that are payable depend on the type of annuity you purchased.
If you bought an annuity that guarantees to pay a pension for a minimum period of time and you die before the end of your guarantee period, any remaining payments will be paid to your estate.
If you bought a joint life annuity, a dependant's pension will be paid to your surviving spouse or civil partner.
If your annuity was guaranteed to pay out a certain amount and you die before you've received that guaranteed amount, the balance will be paid as a lump sum. This lump sum can be paid to anyone you wish. Income Tax will be due on the lump sum at a rate of 55 per cent. The payer will deduct the tax before paying the lump sum.
The remaining money in your drawdown pension pot can be used to:
The scheme can use either of these options or a mixture of both.
The scheme administrator must pay Income Tax on the lump sum at a rate of 55 per cent. They'll normally deduct the tax before paying the lump sum.
Options when you take your pension
Most pension schemes will pay a dependant's pension to one or more people. A dependant can be any of the following:
Not all schemes pay a pension to financial dependants so they may not pay a pension to your partner if you're not married or in a civil partnership. You should check with your scheme administrator to confirm.
Any payments made to the person receiving the pension - the 'beneficiary' - will be subject to Income Tax.
The pension scheme or insurance company paying the pension will deduct any tax due using the PAYE system before making the payment. Follow the link below for further guidance on the PAYE system.
The amount of the lump sum death benefit could be a:
Lump sums are usually paid to a spouse or dependant but they don't have to be. Your scheme will normally ask you to fill in an ‘expression of wish form’ stating who you want any lump sum payments made to. Lump sums can be paid to more than one person. Normally your scheme trustees or provider makes the final decision about who receives it so that the beneficiaries won't pay Inheritance Tax on the lump sum. They usually follow your requests so it's important that you amend your form if your circumstances change.
If you're under 75 when you die the pension scheme should pay the lump sum within two years of them becoming aware of your death. If the lump sum is paid late it will be an unauthorised payment and whoever receives it will have to pay a 55 per cent tax charge on the lump sum.
If you die before you're 75 the lump sum can be paid tax free if it's not worth more than your available 'lifetime allowance' (£1.5 million in tax year 2013-14). Any amount above the lifetime allowance will pay a tax charge of 55 per cent. This tax is paid by the beneficiary.
If you die at age 75 or older the lump sum will be taxed at 55 per cent. The pension scheme administrator is responsible for paying this tax charge and they'll normally deduct the tax before paying the lump sum.
Unauthorised payments from pension pots
Understanding the lifetime allowances for pension schemes
Tax on a pension you pass on or inherit
Tax if you take your State Pension later on
What happens to my pension when I die? - The Pensions Advisory Service website (Opens new window)
