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If you’ve lost someone recently, you may have been left to manage a long list of tasks to settle their affairs while simultaneously grieving.
Some of the most common questions we hear from families are what happens to a pension after death and whether it can be accessed by those left behind.
The answers we give will depend on the type of pension and whether or not the person who died left instructions for its distribution.
Changes in employment, workplace schemes and personal arrangements often mean pensions are spread across several providers.
Each of these providers must be notified separately of the individual’s death. Most of which will ask for a copy of the death certificate and basic details about the deceased.
To locate the details of their pension schemes, try searching through the paperwork. Some people keep this in an organised folder, to make the process a little easier to manage, but this won’t be the case for everyone.
The types of documents that may help point to where pensions are include:
If you have access to email accounts, relevant information could also be held here.
If the person had a financial adviser, they may hold a record of the pensions in place.
If you know who their former employers were and have their contact information, they can sometimes confirm the details of workplace schemes.
How a pension is paid out depends largely on the type of scheme.
Defined contribution pensions are the most common workplace and personal pensions. When the individual dies, the pot does not usually form part of the estate for probate purposes, provided the scheme rules allow the trustees or administrators discretion over who receives it.
When you set up this type of pension, you’ll usually be asked to nominate the beneficiaries of any money left in the pot.
Once the provider is aware of the individual’s death, they usually contact the individuals listed to explain their options for receiving the money.
In most instances, the beneficiary can take the money as a lump sum or convert the money into guaranteed income by buying an annuity.
The State Pension does not pass on in the same way as a private pension. Some people may be entitled to inherit part of a spouse or civil partner’s State Pension, depending on the date of birth and the type of State Pension involved.
Tax treatment depends on the deceased’s age and how the benefits are received.
Where death occurs before the age of 75, benefits from a defined contribution pension can usually be paid to beneficiaries free of Income Tax, provided payments are made within the required time limits.
Where death occurs after 75, Income Tax is generally payable by the beneficiary at their own marginal rate when they receive payments.
Current rules mean that any money left in a pension pot when someone dies will not usually be counted as part of their estate and therefore would not be subject to Inheritance Tax (IHT).
This treatment has meant that pensions have often been used to pass on wealth to the next generation.
The Government announced reforms to IHT in the Autumn 2024 Budget, which included changes to how pension funds will be treated.
From April 2027, unused pension pots are expected to be brought into the IHT scope, meaning the value of the pension at death will be added to the rest of the estate when calculating IHT.
It has been confirmed that couples will be able to pass on their unused pension pots to the surviving spouse or civil partner without incurring IHT.
This change is likely to affect families who previously assumed that pensions would sit outside the estate.
Estates that fall below the IHT threshold (£325,000 per person) today may exceed it once pension savings are included.
The threshold increases to £500,000 if a main residence is passed to children or grandchildren.
This means that married couples can pass on up to £1 million in total before IHT is due.
However, it was also announced that the current thresholds will be frozen until April 2030, with a 40 per cent tax rate applied on anything above this.
With wages rising and assets gaining value, while thresholds remain unchanged, we’ll likely see more individuals and families receiving an IHT tax bill.
For those dealing with a recent bereavement, professional guidance can help ensure that pension benefits are identified and the correct procedures are followed.
For those planning ahead, early advice can prevent problems later, particularly given the changes expected in 2027.
If you need help accessing a loved one’s pension, or would like to review your own arrangements, get in touch.
Wills and Probate Executive
I started my professional career with Mander Hadley when I joined the firm in March 2021, having completed a Law Degree LLB (Hons) at Birmingham City University.
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