If you’re planning for retirement, your top priority is probably how to use your retirement pot most effectively to let you enjoy your “golden years”. But another important part of any retirement plan is who will inherit your pension if you die before taking it all.
In this guide, we outline the pension beneficiary rules in the UK. We also answer common questions such as “How and when do I choose a pension beneficiary?” and “What happens if I die without nominating a pension beneficiary?”.
What is a pension beneficiary?
A pension beneficiary is the person who’ll receive your unused personal or workplace pension when you die. The rules for the state pension work differently. You can usually name your beneficiary in a pension or life insurance nomination form or set out your wishes in a will.
Do I need to nominate a pension beneficiary?
Many pension schemes will ask you to nominate a pension beneficiary using a nomination or “expression of wish” form. You’re not obliged to nominate a beneficiary. However, if you don’t, it’ll be down to the pension provider to decide where your pension assets will go. This could mean them going to someone that you don’t want.
Can I nominate anyone I like as a pension beneficiary?
That depends on what type of pension you have. If you have a defined benefit (DB) pension, the rules of the scheme may mean that any ongoing benefits must go to your spouse, civil partner or, in some cases, someone that depends on you financially (a child under 23, or an unmarried partner who lives with you, for example).
If you have a defined contribution (DC) pension, your options are more flexible. You can nominate whoever you like to receive any of your pension pot that remains unused. Often, your beneficiary will be an individual – such as a partner or child. You can also nominate an organisation. For example, you may wish to leave your pension pot to a charity.
Can I nominate more than one pension beneficiary?
If you have a defined contribution pension, then yes. You should give details of all beneficiaries in your expression of wish form. You should also specify how you would like your remaining pot shared out. For example, you could state that you wish for it to be divided equally between beneficiaries.
How and when do I choose a pension beneficiary?
Assuming you have a defined contribution pension, you can choose anyone you wish as a pension beneficiary. Your pension company will usually send you an expression of wish or nomination form when you first open your pension. The pension company will keep a record of your wishes and take them into account when paying death benefits.
If you don’t get round to nominating a beneficiary when you open an account, then you can ask to fill in a form at any time.
The pension company is legally responsible for making sure that the pension goes to the right person. This is usually decided by checking your expression of wish form. However, this is not legally binding on the pension provider. In rare circumstances, the pension company may take other factors into account when making a decision about who to give the pension to. This might apply if your personal circumstances have changed since you filled in your nomination form.
Why it’s important to keep your nomination form up to date
It’s important to keep your nomination form up to date if your circumstances or wishes change. That’s because if you don’t update your form, your pension could end up going to the wrong person. For example, if you get divorced but don’t update your expression of wishes form, your pension could still go to your ex-spouse.
What happens if I die without nominating a pension beneficiary?
If you die without nominating a pension beneficiary, then the pension company is responsible for deciding who your pension will go to. It will make enquiries to find out more about your circumstances. It will then use its discretion to make a decision about your beneficiary.
If possible, the pension company will liaise with your family, solicitor and any other relevant people to find out more about you. Sometimes it’s difficult to find out who should be the pension beneficiary or evidence may be conflicting. In this case, the pension company can ask for sworn statements or documentary evidence to help it make a decision.
How can my beneficiaries receive my pension?
This depends on the type of pension you have and, in some cases, whether and how you’ve already accessed it yourself. The rules are different for defined contribution pensions, defined benefit pensions, and the state pension. As a brief reminder of how each of these work:
Defined contribution pensions. With these, the money you pay into the scheme over time is invested. The idea is that the value of your investments will grow so that ultimately the amount in your pension (known as your pension pot) will be enough to fund your retirement. You can choose to withdraw the money from a defined contribution pension in a number of ways, including buying an annuity or arranging an income drawdown when you retire.
Defined benefit pensions. Also often referred to as “final salary” pensions, these are a type of workplace pension that pays out a fixed, regular income when you retire. This income is based on a proportion of your salary while you were working for an organisation, and how long you worked there.
State pension. This is a government-backed benefit that pays out a fixed income when you retire, based on the National Insurance contributions you have made over your lifetime. The state pension amount is capped at a fixed level for all recipients.
What happens to defined contribution pensions when you die?
If and how your pension beneficiaries can take your defined contribution pension depends on if and how you’ve already accessed your pot. If you’re a beneficiary, it’s a good idea to take financial advice on how to take an inherited pension. That’s because how you set things up could make a big difference to your income and the amount of tax you pay. Whether you die before or after the age of 75 can also impact the tax implications.
What happens if you have untouched money left in your pension pot?
If you still have some money left in your pension pot when you die (ie you haven’t withdrawn it all or used it all to buy an annuity), then your beneficiaries have 3 main options with what’s left. They can:
Take the inheritance as a lump sum
Convert the pension into their own name and use it to buy an annuity
Convert the pension into their own name and set up a flexible retirement income, called “pension income drawdown”
What happens if you have bought an annuity with your pension pot?
If you’ve used your pension to buy an annuity, then whether it can be left to a beneficiary depends on the terms of your agreement with the annuity provider.
If you opted for a basic, single-life annuity, the annuity payments will stop when you die.
If you chose a joint-life annuity, the scheme will continue to pay out to the person you set it up with for the rest of their life. However, you will not be able to nominate another beneficiary other than the person you set the scheme up with.
Some annuities let you set up a “guarantee period”. If you die during the guarantee period, the annuity provider will pay any remaining benefits to your chosen beneficiary. This can be anyone you like.
What happens to defined benefit pensions when you die?
Defined benefit pensions pay a retirement income based on your salary and length of time in the pension scheme. They include final salary and average salary schemes. These schemes are more common for employees in public sector jobs than in the private sector.
What happens to a defined benefit pension when you die depends on the rules of the scheme. There’s usually less flexibility about who can inherit a defined benefit pension. Depending on the scheme rules, beneficiaries can include:
Your spouse or civil partner
Your children, if they’re either under 23 and in full-time education, or are mentally or physically impaired
Anyone who was financially dependent on you when you died (such as an unmarried partner)
Typically, defined benefit beneficiaries will receive an income representing a percentage of the pension you were getting (or would have got if you die before your pension started being paid). In some cases, they may receive a lump sum – as well or instead.
What happens to your state pension when you die?
Usually, your state pension will simply stop being paid when you die. In some cases, a spouse or civil partner might be able to inherit part of your state pension. The rules can be fairly complex, however. There’s a calculator on gov.uk to help you work out if your partner is entitled to any of your state pension when you die.
Do beneficiaries pay tax on inherited pensions?
There are two main types of tax that those you leave your assets to are potentially liable for: inheritance tax and income tax.
The good news is that your beneficiaries won’t usually need to pay inheritance tax on an inherited pension, including lump sums, even if they exceed the usual tax-free allowance.
Whether inherited pensions are subject to income tax depends on how the beneficiary takes the pension, and the age of the pension owner when they die.
If a pension owner dies before they turn 75, the beneficiary usually won’t have to pay income tax on:
Lump sums from defined benefit or defined contribution pensions
Annuities or money from a new income drawdown fund
If a pension owner is 75 or over when they die, or in certain other circumstances, the beneficiary is likely to need to pay income tax (at their marginal rate) on their inherited pension. There’s a full list of these circumstances on the gov.uk website.
This tax rule means that it’s worth spending a bit of time thinking about who should be your pension beneficiary – or beneficiaries – when you complete your nomination form. Depending on your overall estate planning, it could make sense to leave it to someone who usually pays a lower rate of income tax.
Tax rules on inherited pensions are complicated. It’s a good idea for beneficiaries to get financial advice before they make any decisions.
Bottom line
If you’re opening a new pension, then you’ll need to make a decision about your pension beneficiary (or beneficiaries). Your expression of wishes form will be used to guide your pension provider about who should receive any remaining pension when you die.
For most people, it’s a simple choice. If your circumstances are more complicated, then it may be worth getting some financial advice. Experts also recommend reviewing your will and pension beneficiary every 5 years in case you need to amend them.
Frequently asked questions
You become a beneficiary for a pension when someone names you on their nomination form with their pension provider. This form is also sometimes called an expression of wish form and is usually filled in when someone opens a new pension scheme.
Being named as a beneficiary means that you will almost certainly inherit some or all of that person’s pension. Unless there are exceptional circumstances that mean a pension provider decides to override the expression of wish form, you (and any other named beneficiaries) will receive any money remaining in the deceased person’s pension pot or any lump sum payable.
Yes, you can leave a defined contribution pension to anyone. However, your nomination form is not legally binding so can be challenged if you make a surprising choice. For example, if someone forgets to updated their nomination form after a divorce, then the pension company may use its discretion and appoint another beneficiary. The rules work differently for defined benefit pensions and the state pension.
Yes. You can change your pension beneficiary by filling in a new nomination or expression of wishes form. The pension company will keep a record of your most recent nomination form.
A sibling can inherit a defined contribution pension if they are named as a beneficiary. You will need to fill out a nomination or expression of wishes form to name your beneficiary. A sibling won’t usually be able to inherit a defined benefit pension.
If you die with money left in your pension pot, then this can be passed on to a beneficiary. You can choose anyone you wish as a beneficiary by filling out a nomination form with your pension company. You can also split your pension pot between several beneficiaries.
Your beneficiary can decide if they receive the pension as a lump sum or they want to draw an income. The amount of tax they pay will depend on the type of pension scheme and the age of the pension holder when they die.
A death in service lump sum is a benefit that many employers offer to their staff. It’s a type of insurance scheme that pays out a lump sum to employees’ loved ones if they die when they’re still on the payroll.
Just like your pension, you can nominate a beneficiary using a nomination form. The money received from a lump sum payment is tax free and is usually based on your annual salary.
Pensions are long-term investments. You may get back less than you originally paid in because your capital is not guaranteed and charges may apply. Keep in mind that the tax treatment of your pension and investments will depend on your individual circumstances and may change in the future. Capital at risk.
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Alice Guy is a Suffolk-based finance writer, a busy mum of 4 older kids and a self-confessed personal finance geek. She trained as a chartered accountant with KPMG London before working for Tesco Plc as a business analyst. She loves to write about budgeting, saving, investing and building wealth. See full bio
Ceri Stanaway is a researcher, writer and editor with more than 15 years’ experience, including a long stint at independent publisher Which?. She’s helped people find the best products and services, and avoid the pitfalls, across topics ranging from broadband to insurance. Outside of work, you can often find her sampling the fares in local cafes. See full bio
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