What happens to my pension when I die?
If you have or have had cancer, you might be wondering what happens to pensions when someone dies.
If you die before taking your pension
People who get your money or possessions when you die are called your beneficiaries. When you die, pension money usually goes to your beneficiaries. You usually tell your pension provider who you want your beneficiaries to be. You usually fill out a form called an expression of wishes form. But your provider might state that beneficiaries are the people that depend on you when it comes to money. They are called your dependants.
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Defined contribution scheme
A defined contribution scheme can be a personal or workplace pension scheme. Depending on the scheme and its options, your beneficiaries can usually choose to have the fund paid as a lump sum, an income or a combination of both.
Lump sum
The lump sum paid is usually the value of the fund at the time it pays out. Paying tax on the amount depends on whether you:
- die before you are aged 75 – your beneficiaries can take a lump sum tax-free within 2 years of your death
- die aged 75 or over – your beneficiaries will have to pay income tax on the money they get.
Once the lump sum is paid out, it belongs to your beneficiaries and can be used for any purpose.
Income
Funds can be used to provide an income. This can be done using the following:
- Flexi-access drawdown is where the funds remain in the pension scheme and are invested. The income can be taken as any amount at any point, and it remains part of the pension.
- An annuity is a policy where the funds are used to buy an income.
Paying tax on the income depends on your age when you die:
- If you die before you are aged 75, the income paid to your beneficiaries will be tax-free if the annuity is purchased or the funds are placed into drawdown within 2 years of your death. If there is a large amount of money in the pension, your beneficiaries may have to pay income tax on some of the funds.
- If you die aged 75 or over, your beneficiaries will have to pay income tax on the income they get.
Defined benefit scheme
Defined benefit schemes are usually workplace pension schemes. Your beneficiaries can either get a lump sum or an income. How much they get depends on your scheme.
Lump sum
A defined benefit scheme often pays a lump sum related to the salary you were earning at the time you were employed. This is usually called a death-in-service benefit. Or if you have recently retired, there may be a death grant payable.
Once the lump sum is paid out, it belongs to your beneficiaries and can be used for any purpose. There is not usually an option to get an income with these benefits.
Paying tax on a lump sum depends on whether you:
- die before you are aged 75 – your beneficiaries can take a lump sum tax-free within 2 years of your death
- die aged 75 or over – your beneficiaries will have to pay income tax on the money they get.
Income
Your dependants might be able to get some of your pension after you die, even if it has not started to be paid to you yet. But it depends on your pension scheme.
Dependants are people you are married to or have a civil partnership with. Some schemes include partners you are not in a marriage or civil partnership with, but you usually need to fill in a form before you die. Some schemes may include your children.
The money is usually paid as income, not a lump sum, and will be taxed. The amount can depend on the rules of the pension scheme.
The income will usually be based on the income you could have gotten from the scheme just before you died. The amount will not include any tax-free lump sums you might have taken. The amount will depend on the rules of the scheme. It is often ½ or ⅔ of the pension you would have gotten yourself. There may be other benefits payable if you have children under the age of 23 in full-time education.
About our information
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References
Below is a sample of the sources used in our pensions and cancer information. If you would like more information about the sources we use, please contact us at cancerinformationteam@macmillan.org.uk
MoneyHelper. What happens to my pension when I die? Available at: www.moneyhelper.org.uk/en/pensions-and-retirement/pension-problems/pensions-after-death (accessed March 2023)
MoneyHelper. Defined benefit: final salary pensions schemes explained. Available at: www.moneyhelper.org.uk/en/pensions-and-retirement/pensions-basics/defined-benefit-or-final-salary-pensions-schemes-explained (accessed March 2023)
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Reviewers
This information has been written, revised and edited by Macmillan Cancer Support’s Cancer Information Development team. It has been reviewed by expert medical and health professionals and people living with cancer. It has been approved by Louise Dinsdale, Service Knowledge Specialist – Financial Guidance Team.
Our cancer information has been awarded the PIF TICK. Created by the Patient Information Forum, this quality mark shows we meet PIF’s 10 criteria for trustworthy health information.
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We want everyone affected by cancer to feel our information is written for them.
We want our information to be as clear as possible. To do this, we try to:
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We use gender-inclusive language and talk to our readers as ‘you’ so that everyone feels included. Where clinically necessary we use the terms ‘men’ and ‘women’ or ‘male’ and ‘female’. For example, we do so when talking about parts of the body or mentioning statistics or research about who is affected.
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