Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
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? So many things to think about so it's important to put your affairs in order.
Our advisers can help you with all of these 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 after death, so you can pass on as much of your wealth as possible when the time comes.
If you’re reading this article and the thought of pulling all this information together feels a little overwhelming, help is at hand. Our financial advisers understand how tough it is to make these kinds of decision, so they’ll listen to your wishes and what you want to happen with your wealth when you die and help you to put this in place.
Learn about Fidelity’s advice serviceWhen it comes to personal pensions, the pensions freedoms now allow the pensions pot you have built up over your working life to be inherited tax-free by your beneficiaries and even passed on to future generations. Sometimes free of both income tax and inheritance tax charges, which you can read about in more detail later in this article.
In defined contribution schemes such as SIPPs, there are normally three types of death benefits: lump sums, annuities, and drawdown that can be passed down. The important thing is that you nominate your beneficiaries.
Who can be a beneficiary of my SIPP?
1. A dependant
2. A nominee
A nominee is a beneficiary of a deceased pension scheme member who is not a dependant but has been chosen to be a nominee by the deceased (i.e., named on their expression of wishes).
3. A successor
A successor is a beneficiary of someone who died holding a pension made up of death benefits, who has been chosen to be a successor by the deceased on their expression of wishes.
What is an expression of wishes?
With most pensions the scheme administrator 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 and normally can’t be changed.
However, the scheme administrator still wants to distribute the death benefits in the way you would have wanted. An expression of wishes is your way of telling your scheme administrator who you would like your beneficiaries to be.
Will they pay tax?
One of the advantages of a Self-invested personal pension (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 before age 75, your beneficiaries won’t normally pay income tax on the money they receive, up to the Lump Sum and Death Benefits Allowance.
This allowance limits the value of the lump sum pension savings you can leave your beneficiaries tax free if you die before the age of 75.
Some people might have a higher allowance if they also had a higher protected lifetime allowance, or tax-free cash protections.
If you take any tax-free cash from your pension while you’re alive (including a serious ill health lump sum) then your allowance will be reduced by the same amount. If the pension savings you leave are more than your LSDBA, whoever inherits them will have to pay tax on the extra amount, at their marginal rate of income tax.
The LSDBA doesn’t apply if you die after 75, or if your beneficiaries take your pension as drawdown or as an annuity.
If you die over the age of 75, any lump sum or withdrawals paid out will be subject to income tax based on the individual tax position of the beneficiary.
Full details can be found on the government’s income tax site.
What happens to my company pension scheme?
There are two types of company pension - final salary or defined benefit schemes and defined contribution schemes.
While rare these days, final salary pensions will usually pay out a lump sum to your beneficiary if you die while still working for that employer. This is known as a death benefit. This typically goes to your spouse, but if you don’t have a spouse it could instead be to a child or another dependant.
This money is usually paid as a lump sum and as a multiple of your salary (e.g. two times basic salary) and 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.
Usually they will also be paid an income of around 50% of the pension you would have been entitled to, which is taxed as income and automatically stops being paid when they die.
If you’re unmarried but co-habiting you need to check whether your company scheme will pay out to your partner; most will but check beforehand, as some schemes will still only pay out to a legal spouse or civil partner.
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. This is taxed in the same way as the SIPP described above.
It is vital that you complete and keep updated an expression of wishes form. This will help the pension provider decide where and who to pay any benefits to and can speed things up considerably at a very difficult time. It’s also important you keep this form up to date if personal circumstances change, for example after divorce
If you are single, divorced or have no children to pass your pension on to, then there will not be a beneficiary to receive a regular income, but a lump sum may still be payable. So make sure you have filled in an expression of wishes form designating who you want it to go to.
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 an individual pension plan. This gives far greater flexibility and choice about who inherits your pension on your death, but death benefits are only one of many factors to consider in such a transfer, and there are a number of risks involved. That is why you should always get independent financial advice before making the decision to do this.
What happens to my state pension?
What happens to your state pension depends on how old you are when you die and whether you’re married or not.
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.
If you reached pension age before 6 April 2016 so were already receiving your basic state pension then, your spouse or civil partner can claim your additional state pension, which is based on your National Insurance record. In some cases it may be possible to pass on a state pension lump sum on death and your spouse or civil partner could qualify for bereavement benefits.
If you were not eligible to receive your state pension when the rules changed in 2016, your spouse or civil partner may be able to inherit an extra payment on top of their pension, depending on when you married/formed a civil partnership, when they died and how old they were at the time.
You might also inherit half of their protected payment if your marriage or civil partnership with them began before 6 April 2016, their state pension age was on or after 6 April 2016 and they died on or after that date too.
Find out more about the new state pension here.
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. It doesn’t matter if the value of your ISA exceeds their annual allowance. They can add the value of your ISA at the time you died, or whenever it was closed, to their ISA tax-free.
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, 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 tax on all or some of the money they inherit from your ISA.
If neither of these things happen, your ISA provider will close your ISA account three years and one day after your death. The proceeds of your ISA will be held in your name until they are claimed.
Why you must write your Will
If you die intestate, which means without a Will, you have no say over what happens. Instead, intestacy laws determine how your property is distributed upon your death and any bank accounts, securities, property and any other assets you own at the time of death, are effectively put in limbo, until the court has decided what should be done with them.
Only married or civil partners and some other close relatives can inherit under the rules of intestacy. So, fail to leave clear instructions in a Will and relations by marriage, close friends and carers and even unmarried partners – often misleadingly referred to as common-law spouses - could be left with nothing, as they have no right to inherit under intestacy laws.
Couples may also have joint bank or building society accounts. If one dies, the other partner will automatically inherit the whole of the money. If, say, you have children from another relationship, they could miss out on money that you would want to go to them. Find out more about inheritance planning.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. You cannot normally access your pension until 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.
Pass on your wealth by leaving your pension to a loved one when you're gone.
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