Knowing the type of personal pension that you have is key to understanding what will happen to your pension in the event of your death. The type of your scheme, as well as whether you have already begun to draw the pension, will determine what your partner, children and any other beneficiary will receive.
In a defined benefit scheme, the scheme will pay out until your death. After this, a fixed percentage (usually 50%) of your pension income at the date of your death is paid to your spouse, civil partner or dependents. If there are no remaining beneficiaries, the scheme ceases to pay out. This means that remaining funds are returned to the pension provider. The scheme might also pay a pension for any children that are under the age of 18 or are still in full-time education.
With a defined contributions scheme, your choices when starting your pension directly affect what your dependants will get when you pass away. Your two choices are income drawdown or a lifetime annuity.
In the first case (income drawdown), your pension is effectively valued as a pot. Once it has run out, you will no longer receive an income from it. If you were to pass away before the pot has been emptied, then the rest can be inherited by your family. If you are under the age of 75, then any lump sum or income will be tax free. However, if you are over the age of 75 it will be taxed as income.
If you opted for a lifetime annuity, you’ll have given up that pot for an income stream payable for life. Within this option, there are a further two types.
With a joint-life-last-survivor annuity, the income will be paid to your partner after your death, most likely at a reduced rate. Again, if you’re under the age of 75 at the time of death then the payments will be tax-free, but if you’re over, they will be taxed as income. In the other case, a single-life annuity, the income will stop when you die, leaving nothing for your family.
Although the benefits set out above are true in most cases, the precise benefits vary from scheme to scheme. Ensure that you take the time to research your scheme’s terms and conditions, or better still, get a specialist to do it for you.