We have created many articles on the most efficient ways to save for your post-work years. Preparing financially throughout your working years is the best way to secure a gratifying and safe retirement. Many spend their careers making National Insurance contributions and adding to occupational and private pensions. That all adds up to a lot of money! But what if you do not get the chance to use these funds? Can they be passed on to a chosen loved one?
The quick answer is yes. Most pensions – whether private, occupational or state – offer a facility whereby you can ensure that your loved ones benefit from the money you have built up throughout your career. But is the law different for a State Pension as opposed to a private pension?
In most cases, when someone dies and a State Pension stops, that’s it. Only a spouse or civil partner can claim as beneficiary and the fund inherited is dependent upon how that pension was made up.
Recently, the State Pension has been simplified whereby everyone, on contributing the maximum amount, will receive the same weekly pension. Before 2016, the State Pension was split into two parts: a basic amount and an extra amount called the Additional State Pension.
From 2016 the new system was introduced (creatively called the New State Pension). This is just one amount but is still dependent upon your NI contributions. So, in order to understand what you can pass on, or indeed receive, you need to identify which pension you are receiving and the parts it is made up of.
The Additional State Pension (ASP) was added to an individual’s basic rate. However, you can only claim this if, as a man, you were born before 6th April 1951, or, as a woman, you were born before 6th April 1953. The amount received is dependent upon your National Insurance (NI) contributions. If you receive your deceased partners Additional Pension, it will be paid alongside your own State Pension.
Bear in mind that it was possible to contract out of the ASP. For instance, some employers offered a system whereby you contributed to a workplace pension scheme instead of contributing NI to the ASP. If you meet the criteria of the above dates, check with your current and past employers as to whether you (or your partner) contracted out.
As there have been many different changes to how pensions work since they began in 1902, it is not surprising that calculating the part of the State Pension which can be passed on can get a bit messy. However, it’s good to know that the old ASP was one of the pension payments which was protected.
The law states that you are able to inherit 50% of this amount if you reach State Pension age on or after 6th April 2016 (or you could receive it if your partner died on or before this date).
Some people defer their State Pension (delaying past the official retirement date). This action may have a positive effect on the amount you receive (as the amount of money saved accumulates). For your next of kin, it brings in other benefits. If you were to die while deferring your pension or even after you had begun claiming after deferring it, your partner can inherit at least part of your State Pension.
This is all a little simpler with private pensions but again it depends a lot on which type of private pension was in place: defined benefit (calculated on number of years’ service and final salary) or defined contribution (how much you contribute to the fund).
In normal circumstances, a dependant’s pension is written into the structure of the pension. However, all schemes are different so you need to check with your provider as to what the specific regulations are for beneficiaries.
How a loved one benefits is dependent on how you are accessing your pension. Generally, no one can benefit if you have taken out an annuity. However, if you are still within a guaranteed payment period, the funds can be passed onto a beneficiary (i.e., if you have a guarantee period of 20 years and die after 10, the beneficiary can claim the last 10 years). Also, the co-recipient would still receive payments from a joint annuity.
If the fund owner dies before the age of 75, the beneficiary can receive a rest of life payment. After 75 and the fund will be taxed. Drawdown is a lot simpler. The 75 rule still applies but any funds left after death can be passed onto your beneficiary. They can accept this money in a number of different ways (draw down, lump sum etc.)
Unlike a State Pension where the only beneficiaries are your spouse or a common law partner, you can actually nominate who you wish your private pension to go to with a defined contribution pension. As much as it is usually up to the discretion of the provider who will benefit from the fund, if you fill in a nomination form, this will be taken into account. In most cases inheritance tax will need to be paid.
A defined benefit pension works in the same way but all schemes have their unique rules. It is therefore recommended that you check their regulations and keep your nominations up to date.
We are authorised and regulated by the Financial Conduct authority. This means we can help you to make the best possible decisions when it comes to your pension.