Pensions can actually be a very tax-efficient way of passing your money onto future generations.
If you have a defined contribution pension and die before you retire, your pension will usually pass tax-free to the person you nominated when you first started paying into it.
If you didn’t nominate anyone, the trustees of your pension can award it to anyone who’s financially dependent on you, for example, your children or spouse.
If you die after you’ve retired but before the age of 75 and you were taking an income from your pension using flexible drawdown or flexi-access drawdown at the time, your dependants can receive a tax-free income from your pension. However, if you die when you’re over the age of 75, your pension pot will still transfer tax-free, but your dependents will have to pay income tax on any income they receive from it, in the same way as you would have.
It’s usually only if you’ve used your pension to buy an annuity or income for life that your retirement income stops when you die, although some annuities may continue to provide an income for a dependent.
Whilst each scheme is different and you should check the details of your current pension, if you have a defined benefit pension and die before you retire, your scheme may actually pay out a tax-free lump sum that’s typically two or four times your salary. It may also provide what’s known as a ‘survivor’s pension’ to your beneficiaries.
If you’ve already retired and started receiving an income from your final salary pension when you die, usually a proportion of your pension will be paid to your spouse or partner and/ or any dependent children. These post death benefits can be hugely valuable, so it’s worth speaking to your current pension provider to understand your own situation. You can find out more about this subject in our article What happens to my pension when I die?