Saving into a pension
Some pension schemes may pay out a lump sum to your dependants if you die.
Lump sum payments to your dependants
Many workplace pension schemes include some life cover if you should die before drawing retirement benefits. This life cover may be provided by the pension scheme or through an insurance policy purchased by the employer, or both. If you're not a member of a workplace pension scheme, there may also be a death benefit that could be the money in your pension fund or the lump sum that you have bought through the life cover option offered by the provider.
The amount of life cover that you could receive depends on a number of factors, including the type of pension scheme you belong to, whether or not you're an active member of the scheme (i.e. still contributing to the scheme or working for the same employer) and whether or not you've reached the selected retirement age or started drawing your retirement benefits. It's therefore really important for you to check and understand what applies to you and when this may change.
Cash lump sum death benefits
Cash lump sum benefits paid if you should die before drawing retirement benefits are normally paid to your dependants free of tax. The trustees of the pension scheme usually have discretion how any lump sum death benefits are paid on your death. You should complete an ‘expression of wish’ form to say how you would like the money to be distributed.
This form is kept confidential and only opened by the trustees if you die. You can change your mind at any time by sending the trustees an updated form.
The expression of wish form is not binding on the trustees, but they will usually follow your wishes if these don't deprive someone who was financially dependent on you. You can ask your pension provider or scheme administrator for a copy of this form. You should keep this form updated and send the trustees a new one each time your circumstances change. This will enable them to make a prompt decision on whom should receive the benefit and avoid them having to make in depth enquiries at a sensitive time to your relatives.
Defined benefit pension schemes
If you're an active member of a defined benefit pension scheme that includes life cover, the amount of cover that would be paid on your death is often expressed as a multiple of your pensionable salary or your earnings at the time of your death. The scheme may also refund any contributions that you have paid.
If you've left the scheme but still have retained benefits, the scheme may only pay a refund of your contributions.
In both cases, you should look at the information you have been given by the scheme to find out how much your dependants would receive if you should die. If you don't have this information, you can ask your pension provider or scheme administrator.
There may also be a dependant’s pension due and you should ask the pension provider or scheme administrator for further details.
Defined contribution schemes
If you’re a member of a defined contribution pension scheme, the scheme would usually pay your dependants value of your pension pot. If you are an active member of the scheme that provides life cover, a further lump sum may also be payable. This amount is often expressed as a multiple of your pensionable earnings or salary at the time of your death.
Again, you should look at the information you've been given by the scheme to find out how much your dependants would receive if you should die. If you don't have this information, you can ask your pension provider or scheme administrator.
Alternatively, you may be able to use the pot to buy a dependant’s pension but you will need to speak to the pension provider or scheme administrator to see if this option is available.
Lump Sum Death benefits after you have started receiving retirement benefits
If you’re a receiving a pension from a defined benefit or a defined contribution pension scheme, the pension payments may include a guaranteed period (typically five or ten years). If this is included, and you were to die within the guaranteed period, your dependants would receive a lump sum equal to the number of scheduled pension payments to the end of the guaranteed period from the date of your death or, in certain cases, the income will continue to be paid as if you had not died up to the end of the guaranteed period. If you were to die after the guaranteed period has ended, no lump sum death benefits are payable.
Some pension schemes may pay a ‘pension protection lump sum payment’, the amount of which represents the difference between the cost of purchasing the pension you were receiving less any payments that you received before you died.
If you’re a member of a defined contribution pension scheme and you are drawing retirement benefits through income drawdown, your dependants can receive any uncrystallised parts of your pension pot as a tax-free cash lump sum provided you are aged less than 75 when you die. If you are aged over 75 when you die, or your dependants decide to receive crystallised benefits (i.e. parts of your pension pot that you have already used to provide retirement benefits) as a cash lump sum, these amounts are taxed at, currently, 55%. The Government is currently conducting a review of these tax rates, so they may change in the future.
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.