BUILDING up a pension pot to last you through retirement is really important, but what happens if there’s money left when you die?
While people are generally living longer, it’s important to think about what you want to happen to your pension if the worst should happen.
Whether your money goes to your loved ones depends on what you decide to do with your retirement fund and what type of pension you have.
It’s also important to make sure you’ve updated all your paperwork, particularly if your life circumstances have changed, for instance if you’ve got a divorce.
Legally, your pension isn’t included in your estate, which means it’s not covered by your will. That’s why it’s really important to make sure your pension provider has the right beneficiaries for you.
Here’s the steps you need to take to make sure that any leftover cash goes to the people you love.
If you have a defined contribution pension
Most workplace pensions these days are defined contribution. That means that you save in money each month and what you have to retire on is based on how much you’ve put away and how well your investments have done.
Whether you can pass on your pot when you die depends on what you choose to do with the cash when you retire.
If you buy an annuity (a guaranteed income for life) with your savings, then you will not be able to leave this to your loved ones.
If you want to make sure a spouse is cared for, you can buy something called a joint-life annuity, which means your husband or wife will keep getting money after you die.
If you choose not to buy an annuity, then any money left in your pension pot can be passed on inheritance tax-free.
And if you only use a portion of the money you’ve saved to buy an annuity anything left in the pot can be inherited if it’s unspent.
You need to make sure the pensions paperwork is all up to date and that the person you want to inherit is named as a beneficiary.
In der Regel, when you start a new pension you are asked to fill out a form naming your beneficiaries. If you have lots of pensions from lots of jobs then you’ll have lots of beneficiary forms.
If your circumstances change, for instance if you marry, get divorced, remarry, or have children make sure you speak to all your pension providers to update the beneficiaries.
If you have a final salary pension
If you’re lucky enough to have a gold-plated final salary pension, it’s probably one of your largest financial assets.
Instead of you saving up a pot of money to live off, these give you an income for life based on how much you earnt when you were working.
They are much more rare these days, although they’re still commonly used in the public sector.
Because you don’t have a specific “pot” there’s not a set of funds that can be inherited by your loved ones.
But lots of schemes have rules that make provision for spouses, and some will even look after your dependents.
You can contact the scheme administrator to find out what would happen in the event of your death.
Schemes tend not to recognise unmarried partners, so this is something you might need to consider if you live as a couple but haven’t wed.
Some schemes will allow you to transfer your final salary (or defined benefit) pot into a defined contribution scheme.
If you choose to do this then what’s left in that pot can be transferred inheritance-tax free.
But financial experts say that transferring is often not the best financial decision, so it’s not something you should decide lightly.
If you know you’re in poor health, it could be something you want to consider.
If the pot is worth more than £30,000 you’ll have to take financial advice before you transfer.
If you have a SIPP
If you have a personal pension, for instance a self-invested personal pension (SIPP) this can also be passed onto your loved ones.
The rules are the same as for workplace pensions, so if you use the money to buy an annuity it can’t be passed on.
Nochmal, make sure you keep your paperwork and named beneficiaries up to date.
If you get the state pension
In the vast majority of cases the state pension cannot be passed on when you die.
But if you reached pension age before April 6 2016 you might have built up something called additional state pension.
If you have, then a portion of this can be passed onto a spouse when you die.
You could also have something called a protected payment. This is when people built up more state pension than the maximum amount of the new state pension before it was introduced.
The protected payments were introduced to avoid people losing out under the new scheme).
If your basic state pension and your additional state pension would have paid you more than the new state pension, then the excess is your protected payment.
If you married before April 6, 2016, your husband or wife will inherit half of your protected payment.
If you have ISAs or other savings
Other savings, for instance ISAs, can be passed onto loved ones, but they form part of your estate and so can be subject to inheritance tax.
This means it might make sense to use up those savings earlier so that you can help your family avoid a bill.
There’s normally no Inheritance Tax to pay if either:
- the value of your estate is below the £325,000 threshold
- you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club
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