If you have a private pension and you haven't taken an income from it
Of course no-one likes to think about dying. But naturally you'll want to know what would happen to your pension fund if you were to die before you could take an income from it.
If you were saving in a defined contribution pension, it's likely that the scheme would pay your dependants – or any other beneficiaries you may have chosen – the value of your pension pot.
If you die before age 75, any pension benefits can usually be passed on free of tax. If you die on or after age 75 any benefits will be taxed at the beneficiary’s marginal rate.
If you have an annuity…
An annuity is a financial product that pays you an income for life, which you buy with money from your pension fund. If you die while receiving income from an annuity, what happens next will depend on which type of annuity you've got.
Your Pension Annuity or Enhanced Pension Annuity will end when you die unless:
- you die within the first 90 days of your plan start date, in which case value protection will apply and a lump sum will be paid to your estate. If you have a dependant on your plan, the lump sum will only be paid if you both die within this period and will be paid to the estate of the last one of you to die.
- you die after 90 days but within your guarantee period. Payments will continue until the end of the guarantee period, these will be paid to your estate or dependant on the policy.
- an income is to be paid to a dependant and they are still alive.
- you have chosen to continue your value protection beyond the first 90 days of your plan start date, in which case a lump sum may be payable to your estate or your dependant's estate.
Alternatively, the unpaid guaranteed amount could be paid as a lump sum to your dependant(s), tax free before your 75 birthday or taxed at their marginal income tax rate from your age 75.
If you're drawing down income from your pension…
If you die while receiving income from a drawdown contract, your dependant(s) have three options:
- If you die before age 75, any drawdown benefits can usually be passed on free of tax. If you die on or after age 75, any benefits will be taxed at the beneficiary’s marginal rate.
- They can continue the drawdown and carry on taking an income from it, in which case they'll pay tax on the income at their marginal rate.
- They can use the remaining fund to purchase an annuity, with the income taxed at their marginal rate.
You don't need to choose one of these options in advance.
If you want to find out more about annuities, income drawdown and other ways to access your pension fund, you can visit the "how do I take income from my pension fund?” section of our site
What about inheritance tax?
The death benefit from all pensions is normally free of inheritance tax. It doesn't matter whether the money is from undrawn savings or what's left in your fund after some money has been drawn down. Lump sum payments from annuities may be taxable depending on your circumstances.
If you have an ISA or other investments…
If you die while you have money invested in an ISA, or other investment product, this money will normally form part of your estate. This means it may be subject to inheritance tax.
Why it's important to make a will
Making a will offers you reassurance that what you own will go to the people who matter most to you. We'd strongly recommend that you take this simple step as soon as possible. You'll find information on how to make a will here
Some facts about inheritance tax
How is inheritance tax calculated?
When you die, your executors will need to establish the value of your taxable estate - in basic terms the value of your taxable assets less any outstanding debts.
Your taxable estate can include everything of value that you own – including cash in the bank, investments (including ISAs), your share of the value of your home, any other property you own and the pay-out from life insurance policies. Investments written under trust may be excluded wholly or partially from the calculation.
How much tax do you pay?
Your estate will owe tax on anything above the inheritance tax threshold. In the tax year 2017/2018, the threshold is £325,000. Anything above this will normally be taxed at 40%. (This tax rate can be reduced to 36% if you leave at least 10% of your estate to charity.).
Are you exempt if you're married?
When you die, any assets left to your spouse or registered civil partner, provided they are UK domiciled, are exempt from inheritance tax. On top of this, your partner's inheritance tax allowance is increased by any unused proportion of your allowance, meaning that together a couple can currently leave £650,000 tax free. You don't need to do anything to activate this exemption if you are married or in a registered civil partnership.
What if you're not married?
There is no automatic exemption if you are in a relationship but not married or not in a civil partnership.
Can I reduce my inheritance tax bill?
Money given away before you die is usually counted as part of your estate – so it's still subject to inheritance tax if you die within seven years of giving the gift.
Even if you die within seven years of making the gift there are a range of other exemptions worth taking into account. For example, you can give up to £3,000 away each year inheritance tax-free. Making use of these exemptions can reduce your inheritance tax bill.
What if you have your own property?
From 6 April 2017 an additional residence nil rate band (RNRB) may apply to the deceased’s main residence as long as it is left to a direct descendant and the estate is valued at less than £2,000,000. Beyond that figure, the RNRB (and any transferred RNRB) will be gradually withdrawn. Any unused portion can be passed on to the surviving spouse/ civil partner. It will be £100,000 in April 2017 and rise to £175,000 from April 2020.
The information on this page is based on our understanding of 2017/2018 tax year rules. Please bear in mind that these may change.