Pension Freedoms: Do you know what happens to your pension when you die?

Pension Freedoms Do you know what happens to your pension when you die

8.4 million people in Britain don’t know who will get their remaining personal pension fund when they die.

Research by AJ Bell shows that just 7% of people with a personal pension can correctly identify what happens to the money they leave behind, whilst just 4% know how it is taxed. Of course, it’s not a pleasant subject to dwell on, but it is important to know and act if you want your wishes to be followed when the time comes.

Who gets the money?

There are a few differing opinions about who benefits from your pension when you die:

  • 51% believe that it automatically goes to the nominated beneficiary
  • 25% admit that they don’t know
  • 14% believe that remaining pension funds form part of the estate and is distributed according to their will
  • 4% believe that it goes directly to the government

The reality is that providers have discretion over where pensions funds which are left behind will go, so ultimately, it is up to them, but they do normally follow any valid nominations.

Nominated beneficiaries

To improve the chances of your pension going to the person you want it to, you need to complete a beneficiary nomination form and ensure that it is updated regularly, which it seems many people are not in the habit of doing.

The research asked whether people with a personal pension fund had ever updated or reviewed their nominated beneficiary. Worryingly, 32% said no and 6% did not know. Of those who had:

  • 35% had done so more than five years ago
  • 9% had done so within the past five years
  • 5% had done so within the past three years
  • 5% had done so within the past two years
  • 8% had done so within the past year

Approximately two million births, marriages, deaths and divorces happen each year within the UK. Each one influencing the estate and wishes of a pension holder. Therefore, it is important to regularly check and update your nominated beneficiary to ensure that it is valid and accurately reflects your wishes.

What about tax?

Inheritance Tax (IHT) can drastically reduce the amount received by loved ones. But do you know how your personal pension will be affected by tax upon your death?

58% of personal pension holders say that they have no idea, whilst:

  • 14% think it will be subject to the beneficiary’s Income Tax rate
  • 11% believe it to be tax free
  • 10% think it will be subject to IHT
  • 2% say that it will be subject to Capital Gains Tax (CGT)

Just 4% of people correctly answered that any pension funds they leave behind will be IHT-free if they die before they reach age 75, and will be subject to the beneficiary’s Income Tax if they die beyond 75. Furthermore, all pension funds are considered to be outside of the holder’s estate for IHT purposes.

Information is the key to understanding what happens to the assets and wealth you leave behind. Especially if you want to make sure that your wishes are respected and that your loved ones lose as little as possible to the taxman.

Update your nominated beneficiary and set a yearly date to review it. Make sure that your nomination is valid and reflects your wishes.

For more information, contact us on 0800 612 8099 or request a call back by clicking here.