What happens to my money when I die?

It might be a depressing topic to tackle, but let’s face it, death is an inevitable part of life. So being financially prepared and taking any necessary steps to ensure your hard-earned money goes to your loved ones when you die, is something worth spending time on.

After all, do you actually know what will happen to your pension savings when you die? Does your State Pension simply disappear? And will your family automatically inherit the ISA savings you’ve carefully built up over all those years?

All of these are important questions that need to be answered and, what’s more, being well-informed will enable you to arrange your financial matters in a way that ensures your money goes to the right people when you die. So here’s a run-down of your most important financial assets and what happens to them in the event of your death.

What happens to my SIPP?

One of the advantages of a self-invested personal pension (SIPP), beside the tax relief you get on your contributions and the ability to get involved with how and what you invest in for your long-term future, are the tax advantages on your death. These allow the pension pot you have built up over your working life to be awarded free of inheritance tax by your beneficiaries and even potentially passed on to future generations if kept within the pension. Often free of income tax charges as well.

Who can be a beneficiary of my SIPP?

One of the most important tasks you can do, as soon as possible, is nominate the beneficiaries, you would like to benefit from your SIPP after your death.

Your pensions aren’t part of your estate, at least from a legal point of view, so aren’t covered by your will. That’s why it’s important that you set out who you would like your pension to be passed on to when you die. Known as your beneficiaries, these are the people you nominate as the potential future recipients of your pension on your pension provider’s “expression of wish” form. You should however note it is down to the trustees of the pension to decide who will actually receive your pension, they will take note your recent wishes but are required to take other factors into consideration when reaching a decision on who should benefit.

You can nominate one person to receive the lot or divide the death benefits by stating a percentage amount to be given to various family members and/or friends. You can also nominate charities or trusts. You should review your nomination from time to time, for instance after divorce, to double-check you’re still happy with your beneficiaries and also because the older your nomination is the less weight the trustees may give to it against other factors.

What is an expression of wish?

With most pensions the trustee has the final say over who receives the death benefits of your pension. This is part of the structure which allows your pension to stay outside of your estate for inheritance tax purposes.

However, the trustee wants to take your wishes into consideration when reaching a decision on who to award benefits to. An expression of wish is your way of telling the trustee who you would like to be considered as a beneficiary.

Will they pay tax?

One of the advantages of a SIPP is the tax advantages - both when you’re alive and accumulating your pension pot, but also, very importantly, when you die.

If you die under the age of 75 whether your beneficiaries need to pay tax on what they receive will depend on whether they elect for a lump sum, a pension or an annuity. If they choose to take a pension or buy an annuity there is no income tax charge, but if they take a lump sum it will depend on how much Lump Sum and Death Benefit Allowance you had left when you died. Any tax will be settled directly between the beneficiary and HMRC, so they will initially receive the payment tax free. However, if it takes more than two years for the money to be distributed, they will be taxed in the same way as if you had died over the age of 75.

If you die over the age of 75, there is a whole other set of rules. In this case your beneficiaries will pay tax on any benefits they receive when they are paid out as a lump sum, a pension or an annuity, at their marginal rate of income tax. Where beneficiaries choose to take an income (either as a pension or through an annuity) they will be taxed each time they receive that income. This means a beneficiary could end up paying less tax by spreading the payments over a period of time.

And when your beneficiaries die, any remaining value can also be passed on to unlimited beneficiaries and generations of their choice. And that can continue down the generations, until the value is fully eroded or taken by a beneficiary as a lump sum.

What happens to my workplace pension?

There are two types of company pension - final salary or defined benefit schemes and defined contribution schemes.

While rarer these days, final salary pensions will usually only pay out a death benefit in the form of a lump sum to a dependant, for example your husband or wife or civil partner, or a child under the age of 23. If you die before the age of 75 it will be paid tax-free, as long as it is paid out within two years of your death.

If you’re unmarried but co-habiting you need to check whether your company scheme will pay out to your partner; most will, if that’s what you’ve requested, but check beforehand, as some schemes will still only pay out to a legal spouse or civil partner.

It can also sometimes be paid to someone else if the pension scheme's rules allow it - but it will be taxed at up to 55% as an unauthorised payment.

Because the rules around final salary schemes are less flexible than those of other pensions, some people choose to transfer their final salary pension to a SIPP. This gives far greater flexibility and choice about who inherits your pension on your death, but there are a number of risks involved. That is why you should always get independent financial advice before making the decision to do this.

The defined contribution scheme is now more commonplace. You, and your employer(s) contribute and the pension pot(s) you build up over your working life will give you your income in retirement.

With these sorts of pensions you have your own ‘pot’ of money which, if there is money left in it when you die, can be paid to your beneficiaries. Again, it is vital that you complete and keep updated an expression of wish form. This will help the pension trustee decide who to award benefits to. It’s also important you keep this form up to date if personal circumstances change, for example after divorce.

To ensure your loved ones benefit after your death you need to have lodged an up-to-date expression of wish form with each of your pension providers. As explained above for the SIPP, this ensures the trustees understand your wishes when deciding who should receive your pension.

What happens to my annuity?

An annuity is a financial product that pays you an income for life. Usually that means the payments will stop when you die and the pension funds you used to buy the annuity will be lost. However, different types of annuities are available for those who would prefer a beneficiary to continue to receive payments after their death.

For example, if you have a joint life annuity the surviving person named in the policy will continue to receive payments for the remainder of their life. When setting up a joint life policy the provider will consider the health and lifestyle of both annuity holders, as well as the size of payments they are to receive as a survivor, when calculating your annuity rate.

There is also an option you can take called “value protection” which enables you to pass on the annuity purchase amount, minus any income which has already been taken. Or you could opt for an annuity with a guarantee period. This means on your death any remaining payments are paid to your estate either as a lump sum or regular payments within your chosen guarantee period, typically for a period ranging from one to 30 years after your death.

The government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.

Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.

What happens to my State Pension?

Your spouse or civil partner might be entitled to extra pension payments from your State Pension when you die. It all depends on the amount of National Insurance contributions you made and when you and your spouse or civil partner reach State Pension age.

The main pension rule governing State Pensions once you die comes down to whether you were already claiming your State Pension when the State Pension changes came into effect in April 2016.

There are essentially two different sets of rules. One set that apply if you or your partner reached State Pension age before 6 April 2016. And another that apply to anyone who reached State Pension age on or after 6 April 2016.

Another way to work out which apply to you is whether you or your partner are a man born before 6 April 1951 or you or your partner are a woman born before 6 April 1953. Or later than that.

If the rules of the old State Pension apply to you, then there are two parts of the pension to deal with – the basic State Pension and the additional State Pension - and what might be paid on your death will depend on when you reached State Pension age and when you were married.

If you were married or in a civil partnership and you reached State Pension age before 6 April 2016 and had delayed or stopped taking your State Pension for a while, known as ‘deferring’, your spouse may be able to inherit part or all the extra State Pension or lump sum you had built up.

Your spouse or civil partner may also be able to inherit up to half of your additional State Pension or protected payment. Protected payments usually account for any additional State Pension built up but paid out under the new State Pension.

Under the new pension rules though, if you reached State Pension age on or after 6 April 2016, your spouse won’t get any extra State Pension that you may have been receiving or built up. So if you had delayed or stopped claiming your State Pension for a time that money effectively dies with you.

You should contact the Pension Service to check exactly what you can claim.

What happens to my ISA?

If you’re married or in a civil partnership and you have a stocks and shares ISA, the full value of your ISA can be inherited by your surviving spouse or partner as an additional allowance. It doesn’t matter if the value of your ISA exceeds their annual allowance as the additional allowance is over and above that. The additional allowance will either equal the value of your ISA at the time you died, or whenever it was closed, whichever is higher and can add that amount to their ISA either using the assets in your ISA or other assets they may have.

If your spouse or civil partner has an ISA of their own with the same provider as you, then the assets in your ISA can be transferred straight to their ISA; avoiding the need to sell and retaining the tax advantages of investing within an ISA.

Alternatively, the assets in your ISA can be sold and the proceeds paid to your beneficiaries.

The savings or investments in your ISA remain income tax and capital gains tax free for up to three years after your death, but they will now form part of your estate for inheritance tax purposes; meaning whoever inherits the proceeds of your ISA could have to pay inheritance tax on all or some of the money they inherit from your ISA.

If your assets remain within your ISA at three years and one day after your death, your ISA provider will close your ISA account. The proceeds of your ISA will then be held in a taxable account in the name of your estate until they are claimed.

What happens to my child’s Junior ISA?

While your child’s Junior ISA (JISA) is in their name, the parent or guardian who opens it is responsible for managing the account. If this person were to die before the child reaches the age of 18 then as long as the child is 16 or older, the child can apply to take over the account.

If the parent or guardian dies before the child turns 16, the child's new legal guardian can apply to become the registered contact on the child’s JISA.

In the tragic event that a child becomes terminally ill, the parent who opened the Junior ISA can take the money out early. You will need to notify HMRC and request the money held in the JISA is released. HMRC will then let you know if you can take the money out and provide an instruction letter to give to the JISA provider.

If the child dies any money in their account will be paid to whoever inherits their estate. This is usually a parent, but it could be a spouse or civil partner if they were over 16 and married or in a civil partnership. It is important to note that unlike adult ISAs, JISAs lose their tax benefits from the date of death, so any income that arises once the child has died is subject to tax.

Important information: investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in an ISA or Junior ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a Junior ISA will not be possible until the child reaches age 18. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.