A defined benefit pension commits to providing a guaranteed income once you retire. The scheme rules will set out what may be payable on death and who may be entitled to this. The benefits payable will often differ depending upon if you pass away before retirement as an active member, if you pass away before retirement as a deferred member or if you pass away after retirement.
Defined Contribution Pensions Before Retirement
If you die before retirement, and hold money within a defined contribution pension, the money will not be distributed in accordance with your Will or rues of intestacy. Instead the pension trustees will be able to use their discretion over who will receive the pension. To ensure that the trustees know who you would like to benefit from your pension, it is important that you complete an expression of wish or nomination form. Although the trustees are not bound by this, unless there is a good reason not to, they will usually follow these instructions.
It is important to note that different tax rules apply to the pension in the event of death depending upon if death occurs before or after age 75.
Death before 75
If you die before 75 the pension can paid out tax free as a one off lump sum, used to purchase a guaranteed income (known as an annuity), or can remain in a pension to draw a tax free income as and when required. The final option, known as a beneficiaries drawdown, is only available for those detailed on the expression of wish forms.
Death after 75
If you pass away after 75, the same options are available however, any income drawn, or lump sums received will be subject to income tax at the recipients marginal rate.
As you can see if your pension is a defined contribution pension, it is important to review your expression of wish on a regular basis to ensure that anyone you would like to benefit from your pension in the event of your death, has a full range of options available for receiving any income or lump sums, in the most tax efficient manner.
Pensions after retirement
Once you start to receive an income from your pensions, the death benefits will be dependent upon the options selected for taking your retirement benefits. If you are utilising a drawdown pension, the rules are the same as detailed above for a Defined Contribution pension before retirement.
If you have utilised an annuity or guaranteed income, the death benefits will have been put in place when setting up the contact. These could include spouses benefits usually at a rate of 50% or 100% of the income you receive upon your death, or guarantee periods which will ensure the income will be paid for a minimum number of years regardless of when you or your beneficiaries pass away. Once an annuity is set up there is usually no way to change the death benefits as the level of income you receive from outset, is based upon the death benefit options selected when taking out the contract.
Review your Pension
It is important that you review your pensions on a regular basis, not only to ensure that they are meeting your objectives now, but also that they will fulfil your wishes should you pass away. As part of the service provided by Howard Wright when reviewing your pensions, the death benefits of your pensions will be discussed with you. This will help you to understand what will happen with your pensions if you die, and allow you to take appropriate actions to update beneficiaries or instructions for the pension trustees if your previous instructions are out of date or have never been provided at all.