Pensions are essential for retirement planning, but their fate after death must also be considered.
In this article, we look at how you can ensure the smooth transfer of pension benefits to your loved ones. We also review the key steps your Executor or personal representative will need to take.
Around 79% of UK residents contribute to a pension, demonstrating their importance for financial stability in retirement. Understanding how pensions impact UK inheritance tax (IHT) is critical, as exceeding £325,000 per person in the UK can result in a 40% tax on the estate. If a pension holder dies before the age of 75, the remainder of their pension is passed onto the Executor / next-of-kin tax-free.
What you should do, ahead of time.
1. Review and update the beneficiaries you’ve designated: Review and amend your beneficiary designations on a regular basis to account for any changes to your situation, such as a marriage, divorce, or birth of a child. This guarantees that the intended beneficiaries receive your pension payout.
Designating beneficiaries is an important part of pension planning, to ensure that your benefits match your wishes. Only 35% of UK residents have chosen beneficiaries, highlighting the need for better education and planning in this area.
Beneficiaries’ options differ depending on the type of pension: defined contribution pensions give a lump sum, flexi-access drawdown, or annuity options. Defined benefit pensions may pay a percentage of income to a surviving spouse or partner.
2. Seek Professional Advice: It is essential to consult a financial advisor or estate planner who specialises in pension planning. They can help you with the appropriate documentation, optimise the disbursement of your pension, and ensure compliance with legal duties.
Seeking experienced financial advice is essential for identifying the best approach for you and your loved ones. In the absence of prior preparations around your residual pension funds and assets, your beneficiaries will need to contact (and cover the expense for) additional legal and financial support when you die.
If you need help finding a financial advisor, email support@settld.care, and we’ll put you in touch with one of our trusted partners.
3. Gather and organise documentation: Gather all essential documents, such as the will, death certificate, and any pension-related paperwork. Keep them in a location that is both safe and convenient.
What happens to your pension, post death?
- Contact the Pension Provider: The Executor or personal representative can make use of bereavement notification service, Settld, to contact the pension provider, and all other companies, in one go. Settld also helps with the procedures and paperwork required to transfer the pension to the beneficiary.
- Beneficiary Designations: Upon notification of the death, the pension provider will verify that the beneficiary listed in the will matches the beneficiary designation that is on record. This is why it is important to keep this information updated ahead of time.
- Professional Advice: It is normally recommended that the Executor / Beneficiary speaks with financial consultants or tax professionals. They can offer advice on any difficult legal or tax issues, making sure that all responsibilities are satisfied and the best choices are taken.
- IHT205 Form: The Executor of the will (or the designated personal representative) will then need to complete an IHT205 form. This form offers a precise evaluation of the pension’s worth and aids in determining whether any inheritance tax is due on the estate.
- Keep Complete Records: The individual liaising with the pension provider will need to keep a record of all correspondence, paperwork and actions conducted during the process. For the purpose of retaining records and any future references, this documentation is crucial. Using Settld, everything is kept in one, central, secure place.
Proactive planning and professional advice are essential for managing pension benefits after death. With the right preparation, you can ensure financial security for your loved ones.
If you need help on any steps linked to the above, email support@settld.care, and we’ll do our best to guide you.
Links for further reading:
www.protective.com – what happens to my pension if I die before I retire
www.telegraph.co.uk – what happens to your pension when you die
www.legalandgeneral.com – what happens to your pension when you die
