Retirement:
What happens when I die?

The benefits available to your beneficiaries upon your death depend on:

Whether you have taken benefits from your plan (crystalised the benefits)
How you have taken the benefits and your age (unsecured income, alternatively secured pension or annuity)
Whether you have some form of separate pension insurance (company death in service scheme or pension term assurance)

Death before taking the benefits

The full value of the fund up to the lifetime allowance may be paid to your beneficiaries tax free. Any benefits above the lifetime allowance are subject to the lifetime allowance charge of 55%. This allowance applies to the total amount of benefit.

Some defined benefit schemes may provide a dependant's pension and pay a death benefit as a multiple of salary.

Death after taking benefits

Unsecured income - the residual fund is first used to provide your dependant with benefits. This can be taken by way of purchasing an annuity, continuing with the unsecured income if the dependant is under age 75 or Alternatively Secured Pension if over the age of 75. Alternatively the dependant can take the benefits as a lump sum after deducting a 35% tax charge. Upon the death of the dependant, the residual fund is payable as a lump sum after deducting the 35% charge, but only if they elect for unsecured pension.

Alternatively Secured Pension (ASP)

To enter in ASP you must be 75 or over. It is possible to guarantee ASP payments for up to 10 years. On death the payments would continue, with the maximum limit for each pension year re-calculated annually, based upon your sex and age 75.

If there is no guarantee or the guarantee has expired, the death benefits are contingent upon whether you have any surviving dependants.

If there are dependants, the residual fund must be used to provide dependant's pension benefits. No lump sum is payable. The dependant can opt for unsecured income if they are under 75, ASP if 75 or over, a scheme pension or purchase a lifetime annuity. If there are no dependants there are two options.

Charity lump sum death benefit;
Transfer lump sum death benefit.

The charity lump sum option means that any residual funds are paid to a nominated registered charity free of all tax.

The transfer lump sum may be paid as a pension transfer into the arrangement of another member of the same registered pension scheme.

Lifetime annuity

The benefits upon death are set out at the start of the contract. This can be in the form of a guaranteed period, whereby the annuity is guaranteed for a set period of time from the outset of the contract, even if the annuitant dies within this period. A spouse's benefit may also be purchased, such that if the annuitant's spouse at the outset of the contract survives the annuitant, then a proportion of the income continues for them. Capital protection is another form of death benefit. However, very few companies offer this. With this, upon death before age 75 the original purchase cost, less the gross annuity payments received, less a 35% tax charge. However, if death occurs after age 75 no lump sum is due.

Pension Life Assurance

Company death in service scheme. This is a scheme where usually all employees of a company are covered for life assurance. This is usually a multiple of earnings, but can also supply a dependant's pension. To benefit, death usually has to occur whilst the member is working for the company and under the normal retirement age of the scheme.

Pension Term Assurance

This is an individual personal pension that just provides a set level of life cover up to a set retirement age that has to be before age 75. Whilst this is usually slightly more expensive than ordinary term assurance, it does have the advantage that the premiums are eligible for tax relief at the highest marginal rate, which makes this particularly attractive for higher rate tax payers. If you pay premiums into one of these plans you could lose the protection. This would mean a tax charge on any pension value over the lifetime allowance at an effective rate of 55%.