When you retire, as well as thinking about what you’ll live on, it’s a good idea to make sure you provide for your dependants, such as your partner or children, in case you die. There are several ways you can do this. Your options will depend on the type of pensions you have. Find out what the options are and the tax position of each.
What’s in this guide
Defined benefit pensions
A pension scheme that pays a retirement income based on your salary and how long you’ve worked for your employer.
Defined benefit pensions include ‘final salary’ and ‘career average’ pension schemes. Generally, these are now only available from public sector or older workplace pension schemes.
Defined benefit pensions usually provide a pension income to a partner, or another financial dependant, after you die. This income will be taxed as earnings.
As well as an income, a lump sum can sometimes be paid. This is often if you die within a specified period of time from when you started to receive the income. This is known as a pension protection lump sum. It is paid tax-free if you die before the age of 75. If you die after that age, the person(s) receiving it might be taxed.
It’s worth checking with the pension scheme administrators, as the amount and who it’s paid to will depend on the scheme rules.
Find more in our guide Pensions after death
Defined contribution pensions
This type of pension scheme builds up a pension pot to pay you a retirement income based on how much you and/or your employer contribute and how much this grows.
These schemes are also known as ‘money purchase’ schemes, and include workplace and personal pensions.
If you have a defined contribution pension pot, you’ll have to decide how you want to withdraw money from it.
There are several ways of making sure family members are provided for. How you do this will depend on how you decide to use your pension when you retire.
Here’s a summary of the options as well as the tax position:
| Ways to use your pension | Leave the pension where it is | Buy a guaranteed income (annuity) | Set up a flexible retirement income (pension drawdown) | Take money out as lump sums |
|---|---|---|---|---|
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Options for your pension when you die |
You can leave any money left in your pension to your family, beneficiaries or charities. They can take it as a lump sum or as an income, depending on their needs. |
You can opt to include a guaranteed income for a partner or dependant after you die. This is known as a joint life annuity. You can select a period of time that the income is guaranteed for. If you die during this time, the person you’ve nominated will receive your retirement income until the end of that period. This is known as a guaranteed period. You can include ‘value protection’. This ensures your beneficiaries get a lump sum if you die before you’ve received as income the full amount used to buy your annuity. See our guide on annuities for all your options. |
You can leave any money you don’t withdraw to your family, beneficiaries or charities. They can take it as a lump sum or as an income, depending on their needs. |
Any money left in your pension pot can be left to your family, beneficiaries or charities. They can take it as a lump sum or as an income, depending on their needs. |
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Tax position before age 75 |
If you die before age 75, your beneficiaries can receive the money tax-free. * |
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Tax position after age 75 |
If you die after you’re 75, your beneficiaries may have to pay tax on the money. |
* From 6 April 2024, your beneficiaries can receive the money tax free up to the lump sum and death benefit allowance (LSBDA), but any excess could be charged at their marginal tax rate.
The money also needs to be paid within two years of your death, or moved into another arrangement for payment as income or lump sums in the future.
Any money already taken from your pension pots, and not spent, forms part of your estate (money, property and possessions).
Inheritance Tax is payable if the value of your estate is more than the Inheritance Tax threshold. The standard rate is 40% – sometimes the threshold can be higher.
Book a Pension Wise appointment to help you better understand your options for taking money out of your pension pot and how to provide for your loved ones
Expression of wish form
Make sure you fill in a nomination form (sometimes known as an expression of wish form), which will tell your pension provider who you want to receive the money after you die.
Find out more in our guide Pensions after death
Need more information on pensions?
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