If you die while you are paying into a defined benefit pension, your scheme will usually pay out a lump sum to your beneficiaries, which may be, for example, two or three times your salary. The scheme may also provide contributions made into the scheme as a lump sum.
Final salary pensions must by law offer benefits to a surviving widow or widower if you die after reaching the scheme’s pension age. The amount they’ll get will vary depending on the company you worked for, but is typically around 50% of what you would have received. It’s important to note that these benefits can get impacted, or forfeit entirely, if your spouse chooses to remarry after your death.
Many final salary schemes go beyond the minimum and in some cases may even offer payouts to financially dependent children, too. This isn’t the norm however, and usually your defined benefit pension income will stop when your spouse dies, which means you may not be able to pass it on to children or grandchildren.
Some people therefore consider transferring their retirement savings to a defined contribution scheme, so they can pass their pension savings to their children (or whoever they’ve nominated as beneficiaries) tax-free if they die before 75. This is rarely a good decision however, as when you transfer your pension into a defined contribution plan, you give up a guaranteed income stream and take on all of the risks associated with funding your retirement – instead of leaving it for the company you worked for to worry about. Find out more about the risks of transferring a defined benefit pension in our article Should I transfer my final salary pension?