What Happens To UK Pension When Someone Dies?
When discussing our client's pension plan, we acknowledge that death is not easy to talk about. But, on the other hand, Cameron James believes that understanding the death benefit and the details obtained will help you know exactly where you stand, what you can inherit, and what your rights are if you died or were left by a loved one.
UK Pension Death Benefits
The death benefit is the amount of money that your UK pension provider promises to pay out if your spouse or civil partner dies, and vice versa. Having your affairs in order can help your dependents claim these benefits and reduce the financial concerns they may experience after your death.
A guaranteed death benefit is a benefit term that ensures if the annuitant dies before the annuity begins paying payments, the beneficiary designated in the contract will receive a death benefit. The amount of funds you or your designated beneficiary will receive is dependent on the type of pension, the age of the deceased, and the beneficiaries as to how much money may be claimed as a death benefit.
Basic State Pension Benefit after Death
The Old State Pension: SERPS and SP2
The SERPs pension scheme ran between 1978-2002 and was replaced by the State Second Pension (SP2) in 2002. The SP2 then ended in 2016 and was replaced by the new State Pension. Now you can only contribute to the new State Pension; there is no additional state pension.
SP2
For the SP2 pension, the maximum a spouse can inherit is up to 50% upon their death.
SERPS
Under certain conditions, a widow, widower, or surviving civil partner is entitled to inherit their late partner's State-Earning Related Pension Scheme (SERPs), also commonly known as a state second pension or additional state pension pot. To be eligible for the benefits, the Standard Pension Allowance (SPA) has to be attained, and the proportion of the inheritance is dependent on the gender and the date of birth of their late spouses.
The SERPS scheme allowed you to increase your state pension depending on your work earnings, almost like a state-run workplace pension scheme. Although some individuals would contract out of the SERPS, a primary reason to do so was to put more earnings into their workplace pension scheme instead.
As a result of contracting out, a portion of their NI contributions would be transferred to an alternative pension plan, commonly referred to as a ‘protected rights pension’. If you contracted out of the scheme, then you would not receive any inheritance benefits from SERPS.
The table below will help you understand the payable amount you or your partner can accrue from SERPS.
Government Support for Bereavement
The government has merged payments intended to offer support after a bereavement into a single benefit called the Bereavement Support Payment. If a spouse or civil partner dies on or after 6 April 2017, this may be payable.
To be eligible, the deceased spouse or civil partner must have paid NICs for at least 25 weeks or died due to a work-related accident or illness. The recipient must be covered by SPA and reside in the UK or another country that provides bereavement benefits. The surviving spouse or civil partner is also eligible for Child Benefit for at least one child, and if the late husband, wife, or civil partner was their parent.
Depending on the conditions of the surviving spouse or civil partner, the amount received differs. If the surviving spouse or civil partner has children or is pregnant they will receive the first payment of £3,500 and a payment of £350 for up to 18 months. If the surviving spouse or civilian partner does not have children then they will be paid the first payment of £2,500 followed by payments up to a maximum of £100 up to 18 months.
Defined Contribution Pension Death Benefits
Inheriting a defined contribution pension is easier than inheriting a defined benefit pension. Suppose your loved one is a Defined Contribution member. In that case, as the beneficiary, you can inherit any unused drawdown funds or uncrystallized money purchase funds and have a flexible option on how to withdraw those funds. The Financial Times says options include a drawdown pension, lump-sum death benefit, or purchasing a lifetime annuity.
Who Can Inherit Death Pension UK?
Profiles of those who can inherit a death benefit under a Defined Benefit plan are strictly regulated. Any benefit for the lump sum can only be paid to the dependant, any member of the nominated beneficiary, any beneficiary selected by the scheme administrator, or a successor following the death of a dependant or nominated beneficiary. In summary, benefits from the annuity can only be paid to the dependant or a chosen beneficiary.
You would also qualify as a beneficiary for the following reasons:
- Financially dependant under the age of 23,
- or have attained the age of 23, and or is a dependent owing to physical or mental disability at the time of the member's death.
Profiles of those who can inherit a death benefit under a Defined Benefit plan are strictly regulated. Any benefit for the lump sum can only be paid to the dependant, any member of the nominated beneficiary, any beneficiary selected by the scheme administrator, or a successor following the death of a dependant or nominated beneficiary. In summary, benefits from the annuity can only be paid to the dependant or a chosen beneficiary.
You would also qualify as a beneficiary for the following reasons:
Are Pension Death Benefits Taxable?
The taxes regulations will change depending on whether the deceased died before or beyond the age of 75. In the case of a member's death in service, schemes may pay a lump sum to the member's beneficiaries. The lump sum would be tax-free, except for the LTA tax charge of 55% for lump sums paid over the LTA if the member died before the age of 75.
What Happens to My Pension if I Die Before 75?
If the deceased died before the age of 75, any lump sum paid within two years is deemed tax-free. On the contrary, any lump amount received after two years of the event of the death is taxed at the recipient's marginal rate. Note the LTA charge will apply if the deceased died before 75 and are exceeding the allowance.
If the deceased owned an annuity, all payments would be stopped as soon as the death was confirmed. However, if the annuity has a guaranteed period, the annuity will be paid to the named beneficiary until the end of the time agreed upon by the deceased. This annuity is solely paid to the recipient and is taxed at the recipient's marginal rate.
If the deceased earned income from a joint-life annuity, the income will be distributed to the surviving partner, and this joint income is paid tax-free until their death.
If the deceased had a Flexi-access drawdown, any money paid within two years will incur no income tax and be tested against the deceased LTA. Any money paid after two years of the deceased's death, on the other hand, will be taxed at the marginal rate and will not be tested against LTA.
What Happens to My Pension if I Die After 75?
If the deceased died beyond the age of 75, any lump sum provided to the beneficiary is taxed at the recipient's marginal rate and is not tested against LTA. If the deceased had Flexi-access, the amount paid to the beneficiary is taxed at the recipient's marginal rate.
Defined Benefit Pension Death Benefits
A spouse's, civil partner's (if civil partnership began before April 2016), or dependant's pension is frequently provided in addition to any lump sum granted to individuals who die in service. Benefits may include a lump sum death benefit and/or a dependant's plan pension.
The plan regulations will specify how these benefits are determined, which is generally as a percentage of the member's benefit. It is customary for 50% of the member's pension pot to be due.
What Happens to My Pension if I Die Before 75?
Regarding death in service, a defined benefit (DB) lump-sum death benefit is provided to the members' beneficiaries. The lump-sum would be tax-free for members under the age of 75 at the time of death, and the benefits would be paid out within two years. If the lump sum was greater than the LTA, a tax of 55% is charged on the amount paid over the LTA.
Benefits that are specified, A lump sum death benefit (DBLSDB), is a lump sum paid under a defined benefit agreement. This benefit is often only provided if death before retirement. The sum paid may be a fixed amount guaranteed by the program, be related to the member's income at the time of death, or be based on some other criterion, but it cannot be dependent on the value of funds available to give the benefit. Otherwise, this is not a defined benefit scheme.
If you were to die after your retirement age and the member has started taking benefits, your spouse would typically receive a reduced annual income from the defined benefit scheme. This would be calculated depending on the scheme rules, how many years the holder had been retired etc., but usually would annuals be worth up to 50%.
A universal credit or pension credit is also available to those individuals on a low-income who have reached state pension age.
What Happens to My Pension if I Die After 75?
For members above the age of 75, the amount will be taxed at the recipient's marginal rate. Remember that a crystallization event will have occurred by the age of 75.
The regulations of an occupational pension system will specify what benefits are due and who qualifies as a dependent or beneficiary. Individuals that can be identified as dependents under a Defined Benefits plan include:
The DB scheme member's widow, widower, or surviving civil partner at the time of death.
- A child of the deceased who is under the age of 23.
- Concerning the death of a DB pension plan member, a child of the deceased who, in the assessment of the pension administrator, is dependent on the pension member due to physical and mental disability.
DB Transfer Death Benefits
In most DB plans, a spouse, civil partner, or dependant is entitled to a pension if the member dies before or after retirement. These safe and guaranteed benefits will be lost upon transfer.
However, this will not be an issue for a single transferee with no dependents. There is unlikely to be a lump sum death benefit if the person is a deferred member of a DB scheme. Contributions may be refunded under the plan, but it may be a more appealing alternative to transfer benefits to a money purchase plan that allows the whole fund’s worth to be paid out in the case of death.
Talk to Our IFAs About Your Pension Scheme’s Death Benefits
You can safeguard your family by choosing the beneficiary upon your death via your UK pension plan. These benefits will provide them with the financial help they may need after you pass away. Your pension plan's death benefit assures you of the future of your spouse, civil partner, child, or other designated beneficiary.
Cameron James Expat Financial Planning is a qualified transfer specialist with extensive pension transfer experience in 23 countries. We are regulated by the Securities and Exchange Commission in the United States and the Financial Conduct Authority in the United Kingdom. We also have a method licence to conduct business in Europe.
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