UK Pension Death Benefits
Private and company pensions often carry a financial death benefit. The person/s entitled to claim, and the way in which payment is taxed, can differ. Death benefits are dependent on the type of pension held.
Claiming death benefits is usually a very simple process. You will need to contact the pension provider/s and present your identification and prove your right to discuss and administer the pension first. Once registered, you will be able to make enquiries in relation to the pension structure and death benefits available. In order to claim funds, a certified copy of the death certificate will be required.
Pensions carrying a fund value
This includes pensions which may be titled:
- Personal Pensions
- Group Personal Pensions
- Stakeholder Pensions
- Defined Contribution Schemes
- Self Invested Personal Pensions (SIPPs)
If the pension holds a fund value rather than specifying a “per annum” income value, then death benefits are fairly straightforward. Private pension funds are invested, so their value fluctuates with market performance. These are pension ‘pots’ and their value determines the death benefit available. Some older-style or international pensions may hold exit penalties which can apply on death.
In the event of death, a pension fund will not automatically be disinvested until the pension provider is notified and instructed. It is important to notify the pension provider/s of a loved ones death as soon as possible. This allows the pension provider to engage with you to discuss the next steps for their pension wealth.
Nomination of beneficiary for pension funds
All private pensions allow the member to complete a ‘nomination of beneficiary’ form. This instructs the pension trustees on what they should do with a member’s pension money upon death. In the absence of this form, the pension trustees must act in the best interests of the member, and this may involve an assessment of next of kin, or the wishes expressed in the member’s Will.
Nomination of beneficiary forms are very important. You should contact your pension provider if you haven’t completed one yourself. The pension member is able to nominate loved ones (or charities) to receive death benefits in whatever proportion they wish.
Taxation of pension funds upon death
A private pension plan is free of tax for the death of a member aged under 75 years. Once a member is over 75, death tax rules change; beneficiary/ies are taxed on funds received, to income tax.
If you are the spouse of a member who has died aged over 75 with private pension funds, you may be able to withdraw funds across tax years in order to mitigate your income tax exposure.
Pension death benefits are first subject to lifetime allowance taxation. Lifetime allowance taxes due will be deducted before death benefits are paid out.
Defined benefit pensions
Final salary and career average schemes
Death benefits under defined benefit schemes are pre-determined. These schemes offer limited death benefits, with no option to nominate a loved one who doesn’t qualify under scheme rules.
Defined benefit scheme death benefits differ between schemes. For example, the Rolls Royce Pension will have different death benefits to the BP Pension Scheme. It is important to research your pension benefits and understand how your wealth will be distributed in the event of your death.
Check your pension scheme documents and consider the death benefits quoted both ‘pre’ and ‘post’ retirement. For the death of a member working at the company they held a pension, a lump sum ‘death in service’ benefit linked to the pension may also be available.
Typical DB scheme death benefits
Typically, DB scheme death benefits pay a reduced member income for:
- A spouse or nominated spouse, typically termed a widow’s pension
- A civil partner
- A long-term financially dependent partner. They must either prove their financial dependence and relationship, or have already been nominated and approved by the member.
- A child up to age 18 years, or up to age 23 years if in full time education. Children’s death benefits are only payable until they leave full time education or reach a certain age. Children’s death benefits are usually a lower percentage than a spousal pension, and can be reduced by number of children.
- A disabled child, who qualifies as a lifelong financial dependent of the member (subject to pension trustee approval)
- An individual who is dependent on the member due to mental or physical disability.
Additionally, many defined benefit schemes offer a 5 or 10 year guarantee period. If the member dies within the guarantee period, income will pay out in full for the remainder of that guarantee period.
Taxation on DB Death Benefits
The guarantee period portion of a death benefit is deemed part of a member’s estate. This means it will be subject to inheritance tax.
Scheme income death benefits are taxed upon the beneficiary. This means, those who claim a widow’s pension or other income death benefit will be taxed to their marginal income tax rate. This is usually payable to under PAYE and adjusted automatically to the individual’s tax code.
Register pension death benefit wishes
Whatever pension you hold, it is important to register your wishes with the scheme. With a simple form, you will ensure funds are distributed to loved ones correctly and promptly.