Death Benefit Options

Death benefit options relate to the different ways your pension value can be distributed to surviving beneficiaries in the event of your death. There are different death benefit options based on the type of pension you have and the specific terms of that pension. You should always consult your pension scheme to uncover the details that pertain to your situation.

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You are more than welcome to discuss your pension requirements with Peter or another of our pension advisers, at a free introductory meeting.

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Surviving beneficiaries

A surviving beneficiary of your pension is usually your spouse, civil partner, de-facto partner or child (dependant).

You may choose to nominate someone else or a charity – a nominee - to receive your pension payment(s) in the event of your death. In some cases, former partners and spouses may be entitled to the payment(s) if you were still together at a time when you were allowed to accept your pension income. 

If you would like to nominate someone as a beneficiary of your pension, you should contact your pension provider and complete a nomination form. It’s essential that you keep this form up to date.

How pension death benefits are paid

Pension death benefits can be paid out in different ways. The money is typically paid out as a lump sum, as beneficiary drawdown or as a beneficiary’s annuity. If the death benefit pays out in a lump sum, the beneficiaries will receive a fixed amount and no further payments will be due.

If you held an annuity, various death benefit options can be chosen at outset such as a beneficiary’s annuity, a guarantee period or capital protection. If death benefits aren’t included, the annuity would end on your death.

If your pension funds hadn’t yet been touched or you had placed them in a drawdown plan, your beneficiaries may be able to leave the funds in a beneficiary drawdown plan and leave them invested to access as required. 

The rules on death benefits can be complex, and you may need support understanding how they work. Moreover, pension scheme holders and their beneficiaries may or may not get the option to decide how pension death benefits are paid out. If you do have options, you should consult with a financial adviser to make the best decision for your family.

We can offer tax-efficient planning so you can minimise taxes on your retirement income and investments.

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Using a Trust to distribute your benefits

Using a trust to distribute pension death benefits is desirable to some people. This is when a lump sum is paid into a trust on your death and the trustees oversee the trust funds and distributes money to beneficiaries in line with the terms of the trust (often guided by the wishes left by the pension holder before death). 

You may prefer to use a trust to make payments to beneficiaries if the beneficiary is:

1. Young
2. A vulnerable person
3. Part of an unstable family
4. Experiencing or has experienced addiction problems (gambling etc.,)
5. Perceived as financially reckless

Death benefit options and tax

There is not usually any inheritance tax to pay on pension death benefit payments, although the government plans to change this from April 2027. If the pension holder dies before the age of 75, beneficiaries, dependants or nominees will not have to pay income tax on the payments (in some cases, the death benefits must be dealt with within 2 years of death or income tax can apply). For lump sum death benefits, tax can apply to any lump sum that exceeds allowable limits. If the pension holder dies after the age of 75, the beneficiaries, dependants and/or nominees will have to pay income tax on payments at their marginal rate. It could be the case that no income tax is due, and there are strategies to mitigate tax liability.