How do pension death benefits work?
Online searches for life cover have risen, with many seeking a quick-solution to their worries. It is important to note that insurers are now considering their approach to pandemic pay-outs across their product ranges.
We are living in an unprecedented time for the financial services industry. Insurers are getting nervous, but life and sickness protection IS still available. It is increasingly important to deal with a regulated company with the technical research resources needed to ensure that any cover you take out now will protect you in the right way.
You can consider pension wealth to form part of your estate. Dependent on the type of pensions you hold, your loved ones may be entitled to them on your death.
Private Pensions & Defined Contribution Schemes
Most private plans, or any pension plan with a ‘fund value’ can be left as a lump-sum benefit for loved ones. This payout is usually tax free for death if the member is under 75 years. For death after reaching 75, the individual who receives the benefit will be taxed as if the funds were income; taxed at their marginal rate.
Some schemes have different nuances, such as additional life cover and early-exit penalties. Most private pensions are now adjusted to fit these new rules. If you have a very old-style plan which hasn’t been reviewed, it may have different benefits and drawbacks. Check your pension plan to ensure you fully understand its death benefits. Make sure your loved ones are nominated according to your wishes.
Final Salary & Career Average 'Defined Benefit' Schemes
A final salary or career average scheme is pre-structured and pre-defined, as are its death benefits. If you hold pension scheme, check what the plan offers to your loved ones upon death. It is usually a lower value income, payable to a spouse. Schemes can offer death benefits for a proven lifelong financial dependent such as a long-term partner or disabled child. Most schemes offer children’s pensions up to their age of deemed financial dependence, some are limited to spouse/civil partner benefits only.
If you are considering the benefits and drawbacks of converting a final salary scheme to a private pension, read our Guide to Pension Transfers first.