Pension Death Benefits

Death Benefits

You’ve saved sensibly all your life and built up a healthy pension fund, but what happens if fate catches you by surprise and you get knocked over by a bus?

The amount of your pension pot which ends up with those you have left behind depends on how old you were when you died.

Death before retirement before 75

If you die before your pension age, your pension fund will most likely be paid to your chosen benefactor as a tax free lump sum. It the fund is more than the Lifetime Allowance (£1.5 million in the tax year 2012/13), then the excess is taxed at 55%.

Death after retirement after 75

If you die after retirement age, but before 75, what happens to your money depends on what you chose to do with your fund at retirement age.

• Secured Income: If your retirement has been used to buy an annuity, that annuity can be used to provide a dependent’s pensions (taxed as income). Also, part of the annuity could have been set up so that a lump sum is paid if death occurs within a fixed period. That lump sum would be taxed at 35%.

• Unsecured Income: If you didn’t buy an annuity but chose to draw down an income from the pension fund, the balance of any unused fund can be used to buy a pension for your dependents. This is paid as a lump sum (taxable at 35%) or combination of both options.

Death after retirement after 75

After 75, the pension fund must be used to buy an annuity or put into an Alternatively Secured Pension. With an ASP, an individual can continue to invest their pension savings and draw an income from their fund. There are laid down limits to this. On death only dependents pensions can be paid. If there are no dependents, left over funds are refunded to the scheme, the employer or paid to a charity.

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