How to Handle Your Pension in Your Will:

No one likes to talk about it. They don’t even want to think about it. Yet considering how best to handle your pension when it comes to leaving death benefits is something that your beneficiaries will thank you for. It’s sadly not something that sorts itself out just by having a will. In fact unlike property, savings and other investments, your pension does not form part of your estate and thus, wont be covered by your Will. It can therefore add another layer of complexity at an already difficult time for your loved ones.

The good news is that a few minutes of your time thinking through the inevitable can spare them the ordeal. Perhaps surprisingly, who actually gets your pension savings will likely be down to the discretion of your pension provider. It will make this decision based on information it holds, or manages to acquire, once you have passed. 

To give them direction in their decision making, you should complete a ‘nomination’ form which will allow you to state what you would like to happen on your death. Failure to complete this could cause many issues, such as a delay in paying out the funds, or much worse, it going to the wrong beneficiaries altogether. If there is no form altogether, the provider may well look at the will, but its not a given that they will follow the same instructions.


Leaving a Pension Behind

People also take their pensions in different ways. So, what actually gets left to your beneficiaries will mostly be tempered by this.

Leaving behind cash:

You may have chosen to take the first 25% of your pension as a tax-free lump sum. This is no longer considered ‘pension benefits’ and if this is not used up before you die, it will be absorbed into your estate (thus a Will IS required). This means that your beneficiaries may have to pay Inheritance Tax on it – so they’ll end up getting less than you (and they!) probably would have liked. The same is also true if you take your pension piece-meal, but don’t use it all up before you die.

Leaving behind a pension:

Certain types of pensions can be left to loved ones once you have died. This makes handling pensions through a nomination much more manageable. So, let’s take a look at some of the options:


joint annuity

Joint Annuity:

This can be thought of as an insurance-like product for couples (or any other beneficiary for that matter). For example, payments continue to be made to your other half after you die for the duration of their life.

guaranteed period annuity
Guaranteed Period Annuity:

Pension payments made from an annuity with a guaranteed period continue to for the duration of that period, irrespective of whether or not you die before it ends. So, suppose you take a guaranteed ten-year annuity and die after six years. Your beneficiary will continue to receive payments for the remaining four years until the guaranteed period ends.

capital protected annuity
Capital Protected Annuity:

In this scenario, your loved ones inherit a lump sum from your pension pot minus any annuity payments you received before you died.

adjustable income

Drawdown or any remaining Uncrystallised pension:

With this option, you can choose who you want to receive any money left in your pot after you die.

What are the tax implications associated?

There’s no escaping that tax is a complicated matter. As such, it is nearly always best to seek professional advice if you are concerned about the tax implications around your pension. Many factors will determine how much tax will need to be paid, not least what age you are when you die. To illustrate, the table below shows the taxes your beneficiary will pay as determined by the age at which you die:


table showing taxes your beneficiary pays

Your beneficiary may also need to pay extra tax if you’ve exceeded the lifetime allowance.

Inheritance Tax

So, where does Inheritance Tax come into all of this? Well, something you might want to consider when handling your pension in your Will is that, unlike cash savings, pensions sit outside of your estate. As such, they do not count towards your Inheritance Tax threshold when you die.

This makes leaving pensions to loved ones extremely popular, especially when you have an inheritance tax issue. So think before you automatically decide to take money from your pension, it may be better to use money elsewhere. After all, you will want to make sure that as much of your wealth as possible stays with your nearest and dearest.

To Summarise:

When it comes to handling your pension on death, there is much to consider. So, if you want to make sure your pension makes its way to your loved ones hassle-free when you die, do remember to take some time to think carefully through what pension monies you have and how best to pass them on. And, if you’re in any doubt at all, please do get in touch with a reputable financial adviser (like us) who will be only too happy to help walk you through.

Written by Ian Barnett

Ian is an experienced Chartered Financial Planner as well as being a Fellow of the Personal Finance Society, with over 25 years’ experience in the financial services industry.  With a broad range of client experience and expertise, Ian specialises in financial matters from Pre-Retirement Planning to Inheritance Tax Planning and all points in between.

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