Pensions are notoriously complex and different rules can apply to different pensions held by different companies.
After someone’s death, the benefit of their pension may be payable to the person they nominated when the scheme was set up.
Workplace and private pensions
Sometimes a workplace or private pension scheme will provide a lump sum and/or income to your beneficiaries after you die. This will be paid to the nominated person, but it is possible for a dependant to make a claim on the funds if they have been excluded.
When you reach retirement age, you may choose to remove a lump sum of 25 percent of the value of the fund from your pension. If this is still in your estate at the time of your death, then Inheritance Tax may be payable on it, depending on the size of your estate.
You can gift this during your lifetime if you choose, but if you were to die within seven years of making a cash gift, then all or part of its value will be taken into account when Inheritance Tax is calculated.
Leaving pension funds to a beneficiary
Where a joint annuity is held, payments, usually to a spouse or partner, can continue after the death of the pension holder.
If the pension guaranteed annuity payments for a certain period of time, then these will continue to be made to a beneficiary for that period of time.
The pension may entitle beneficiaries to receive a lump sum payment. If the deceased left children under the age of 18 or a dependent partner or relative, then the pension trustees may make the decision to award a payment to them.
Payment of Inheritance Tax
Pension funds are paid at the discretion of the pension trustees and do not usually form part of the deceased’s estate, in which case Inheritance Tax is not payable on their value.
However if the pension trustees are not able to make a decision as to who the pension funds should be paid to, they may make the payment into the estate, in which case the money would be included in the Inheritance Tax calculation.
Following someone’s death, you should speak to their pension provider to find out how and to whom any payments will be made.
Because pensions are such a complex area, it is advisable to take independent advice when writing a Will, dealing with pension funds or administering an estate.
If you would like to speak to one of our Wills and probate experts, ring us on 0117 952 0698 or email us at firstname.lastname@example.org.