What are the rules around transferring a pension on the holder’s death?
When it comes to the rules for pension transfers upon death, unfortunately they differ between pension types and provider.
Some rules relating to age and taxes remain the same, however:
* If the pension holder died before they were 75, then any benefits from the pension following a transfer will be available tax free.
* If the pension holder who died was 75 or older, or they were under 75 but the transfer and subsequent claims take longer than one year, then any lump sum payment or drawdown will be subject to the beneficiaries’ own tax rules.
Other rules that apply to pension transfers after death depend on the age of the initial pension holder and whether or not they had already begun drawing from their pension.
In many cases, where the pension holder died before they began drawing their pension, the pension can remain in place to be utilised by the person, or people it’s is transferred to. It’s also possible for a pension to be split, with the proceeds and viable benefits transferred to numerous beneficiaries.
What if the pension holder who died was already drawing from their pension?
If the pension holder died while they were already drawing from it, then a pension transfer upon death can be different. If a guaranteed annuity was in place, the person or people that pension is transferred to could receive a lump sum or regular payments to the total of the guaranteed amount.
After that, however, it depends on how much was in the pension as to what further benefits are available.
Other details that affect the rules of a pension transfer upon the holders death include the type of pension it is:
* Defined benefit pension
* Defined contribution pension
* State pension
As you can see, pensions transfers when someone has died can be quite complex. A number of different details are important and effect the way benefits are paid and taxed.
Is there inheritance tax to pay on pension transfer upon death?
This will depend on when you transfer your pension, and under what circumstances…
When the holder dies within two years of transferring their pension
When it comes to Inheritance Tax (IHT) and pension transfers, it’s typically straightforward with pension benefits not being subject to IHT upon a pension holder’s death. However, there is an exception.
If a pension holder has transferred their pension at least two years before they die, this could be considered by the government and HMRC as a tactic to avoid paying IHT on their estate.
However, if it can be proven that a pension transfer within two years of the holder’s death was made for reasons other than to avoid paying IHT, then the pension transfer and benefits will not be considered as part of the estate of the person who has passed away and will be taxed in accordance to pension rules, rather than inheritance tax rules.
Essentially, if you’re getting your affairs in order before your death and arranging a pension transfer to loved ones to avoid the possibility that IHT tax will be applied to the pension transfer value, it’s best to do it sooner rather than later.
Charges on pre-death pension transfers during ill health
When you transfer your pension to someone else during a period of ill-health leading to your death, charges will only possibly apply if the transfer is made within two years of your death.
If the transfer is made longer than two years before you die, even if the reason behind the transfer was to ensure your loved ones benefit from your pension once you’re gone, it should still be safe from HMRC’s Inheritence Tax (IHT) estate charges.
If HMRC deems a pension transfer made within two years of your death, was done so to avoid paying inheritance tax, they could charge the transfer value of the pension pot at recipient’s tax rate.
What are pension transfer death benefits?
Essentially, pension death benefits are where the recipient of the transferred pension gets to choose how, and possibly when, they receive the relevant funds from the pension that’s been transferred.
In most cases they can opt for a lump sum at the time of the transfer, or to receive a regular income from it. The choice is usually entirely theirs as the eligible pension fund belongs to them.
For different pension types there may be additional benefits, however, in most cases the main pension death benefits are as we’ve detailed. It’s also important to bear in mind that in some cases, death benefits will be tested against your lifetime allowance.
Can I transfer a state pension upon death?
When it comes to the death benefits and transfer options relating to a state pension, the answer varies and depends on the age of the pension holder, when they died and how much they have contributed to it during their working life.
If the state pension holder dies after they’ve begun drawing from it, then depending on their contributions through national insurance, there could be some additional payments due to their spouse or civil partner. However, you must be of pensionable age to make any claim on your partner’s pension.
In addition, if you reached state pension age before April 6th, 2016, your pension won’t benefit from any additions from your partner’s state pension if you remarry, or form a new civil partnership before you reach pensionable age. If you reached state pension age after April 2016, different rules apply.
Where a partner dies before you reach pensionable age, you may be eligible to claim bereavement benefits and any benefits relating to their state pension and both your national insurance contributions will come into play once you reach state pensionable age.
You should be informed of what will happen in your specific situation once you’ve notified HMRC about your partner’s death.
Are the rules different for private/company pensions?
The transfer after death rules are different for private, personal pensions, including a Self-invested Personal Pension (SIPP) than for company pensions. The rules also differ between pension types and other details including the age of the pension holder when they died and the person or people the pension will be transferred to.
With regards to death benefits, in most cases, they will remain the same; the recipient of the pension can opt to receive a lump sum or regular payments.
Transfer upon death for personal pensions
In the event that a loved one dies and you know they have a private personal pension, any will the holder of those pensions has left should include provisions for the transfer of their pensions to specified beneficiaries. If that’s not the case, then the pensions would typically be transferred to a husband or wife or any children, where there’s no spouse.
The tax treatment of a personal pension is typically based on two details:
* The age of the pension holder when they die.
* If the pension funds are transferred to the beneficiary/beneficiaries within two years of their death.
Contacting the personal pension provider to inform of the holders death and ask them what happens next should give you some useful information as to what the transfer options and death benefits of the pension are.
Transfer upon death for company pensions
Even if the pension holder who has died has nominated beneficiaries of their workplace pension, it’s still helpful to contact their employer to inform them of the situation. They should then take any required steps with regards to their workplace pension.
As with personal pensions, the way a workplace pension transfer or provision of death benefits operates depends on the age of the pension holder when they died and whether or not they had begun drawing from their workplace pension pot.
Another detail that affects the way a pension transfer or the death benefits relating to the workplace pension is the type of pension it is.
Specifically, whether it’s a:
* Defined Benefits pension
* Defined Contribution pension
With a defined benefits pension scheme, where the holder hasn’t yet retired, a single lump sum is typically paid to the recipients and if the holder was under the age of 75, that lump sum will be tax free. Some defined benefits pensions also pay a survivor’s pension, which is taxable.
The death benefits or transfer of a workplace defined contribution pension, is a little more complex and depends on a variety of details.
* If an annuity has been purchased and what type it is
* Whether or not the pension has flexi-access drawdown facilities
* The age of the holder when they died and how much they had already drawn from the pot
* The age of the beneficiaries and their tax status
The pension transfer advisors we work with are fully registered and experienced in transfers upon death. They can help you plan how to distribute your pension when you die or help you understand how to manage a pension that has been transferred to you after someone close to you has died. Get in touch with us today and we’ll connect you with the right pension transfer advisor for your needs.
Can my pension be transferred to my spouse after my death?
In most cases, a fully-flexible pension, including its benefits can be transferred to your spouse after your death. If you have purchased an annuity, however, then that isn’t always the case. If you purchase a guaranteed annuity that will pay a set amount for a set period of time, then your spouse will receive the remaining payments of the guaranteed period.
But, if you didn’t purchase a guaranteed annuity, then the payments will stop upon your death. If you have a separate pension that has yet to be fully tapped, then that pension or part of it can be transferred to your spouse after your death.
Can I arrange to transfer my pension into a trust after my death?
The death benefits of the pension or the pension itself, where its a fully flexible pension, can be transferred into a trust upon or after the holder’s death.
Transferring your pension to a trust has a variety of benefits that can prove useful to your wishes for the future use of your pension death benefits or the entire pension.
It can make it easier to:
* Split the death benefit lump sum between different people at different times
* Share your pension between family, friends and a charity of your choice
* Plan ahead and ensure any children under the age of 18 eventually benefit from your pension without ex-spouses or others being involved.
However, many flexible personal pensions already offer more control and options for a transfer upon death, which could mean transferring to a different type of pension while you’re alive might be a more viable option for your plans than using a trust.