When you die your spouse, civil partner or beneficiaries may be able to inherit your pension. The trustees of the pension plan will decide who gets the pension, but they will look at your expression of wish form.
The exact rules for pension death benefits depend on the type of pension you have and how old you were when you died.
The Executor or Personal Representative responsible for administering the estate will need to contact each pension provider or pension administrator (if it is an occupational pension scheme) to inform them that the member has died with a view to establishing: the value of the plan on the date of death; whether the plan has been fully crystallised; whether the plan had received a transfer value from another pension arrangement within the last two years; details of any nominations; and whether there have been any excessively large contributions made in the two years prior to death.
This article will talk about the duties of the personal representative, problems with pension death benefits, and how to make sure that HM Revenue and Customs gets any taxes that are owed.
Taking on the role of personal representative means you have certain responsibilities in dealing with the estate of the person who has died and you are potentially opening yourself up to liabilities if you do not deal with the estate correctly.
Being a personal representative is a role for life, as any claims against the estate that happen in the future will have to be dealt with by you.
It’s hard enough to lose a loved one without having to figure out pension benefits and survivor rights. If you’re wondering who gets the pension after death, you’re not the only one; it’s one of the most common questions we get at our financial planning office.
In this comprehensive guide, I’ll walk you through everything you need to know about pension benefits after death, beneficiary options and how to ensure your loved ones are financially protected.
Understanding Who Receives Pension Benefits After Death
For those who have pension plans, what happens to their money when they die depends on a few main things:
- The type of pension plan they had
- Whether they died before or after retirement
- Their beneficiary designations
- The specific provisions of their pension plan
Most of the time, the retirement plan document spells out the options for beneficiaries. Let’s break down the most common scenarios.
Spouse as Default Beneficiary
For married pension holders, the spouse is typically the default beneficiary. Unless the spouse has waived this right (which requires written certification and often notarization), they’re entitled to receive survivor benefits from the pension.
As Michael Ruger, CFP® at Greenbush Financial Group explains: “If the pension had a survivor benefit option, payments may continue to the surviving spouse, but potentially at a reduced amount (for example, 50% or 75% of the original benefit).”
When Non-Spouse Beneficiaries Can Receive Benefits
Most pension plans give priority to spouses, but there are times when children or other family members can receive benefits instead of spouses.
- If the spouse has formally waived their rights to survivor benefits
- If the pension holder was unmarried and designated non-spouse beneficiaries
- If the pension plan offers specific options for non-spouse beneficiaries
- If a “period certain annuity” option was selected (more on this below)
According to financial experts, “Pension plans normally only permit benefit payments to be made to the member or the member and their surviving spouse; however, in certain circumstances, some may permit a beneficiary who is not a spouse, like a child.”
Types of Pension Plans and Their Beneficiary Options
The type of pension plan significantly affects who gets the benefits after death and how they’re paid out.
Defined-Benefit Plans
Traditional pensions are defined-benefit plans that provide a predetermined retirement income based on salary history and years of service. Beneficiary options typically include:
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Joint-life annuity: The surviving spouse receives reduced payments (often 50-75% of the original amount) for their lifetime.
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Lump-sum payout: The beneficiary receives the remaining balance of the pension in a single payment.
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Period certain annuity: Payments continue for a specified period regardless of when the pension holder dies.
As Gage DeYoung, CFP® from Prudent Wealthcare explains: “If your parents designated you as beneficiaries and chose a period-specific pension option for payment upon retirement, then you and your siblings would be eligible for ongoing benefits until the period ends.”
For example, if someone chooses a 20-year period certain option and dies 10 years into receiving payments, their beneficiaries would receive payments for the remaining 10 years.
Defined-Contribution Plans
These plans (like 401(k)s) allow employees to contribute portions of their salary, sometimes with employer matching. Beneficiary options include:
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Lump-sum payout: The beneficiary receives the full account balance at once.
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Gradual drawdown: The beneficiary takes periodic payments over time.
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Annuity purchase: The beneficiary uses the funds to buy an annuity for regular income.
What Happens When Pension Holders Die Before Retirement?
A particularly confusing scenario is when someone dies before they’ve started receiving their pension. Here’s what typically happens:
For Married Pension Holders
If a married pension plan participant dies before retirement, the surviving spouse is usually entitled to a pre-retirement survivor annuity. This benefit is typically:
- 50% of what the pension holder would have received at normal retirement age
- Payable when the pension holder would have reached retirement age (though some plans allow earlier payments)
The Employee Retirement Income Security Act (ERISA) specifically protects spouses in this situation, ensuring they receive benefits if the participant had earned a vested pension benefit before death.
For Unmarried Pension Holders
If an unmarried pension participant dies before retirement, what happens depends entirely on the plan’s provisions. Some plans may:
- Pay a death benefit to designated beneficiaries
- Allow the account balance to be distributed to named beneficiaries
- Provide no death benefits at all (meaning the pension ends with the participant’s death)
Social Security and Pension Payments After Death
An important distinction exists between private pensions and Social Security benefits when someone dies.
Social Security Notification and Payment Rules
Social Security does not automatically know when someone passes away. The death must be reported through:
- Funeral homes (most report deaths if you provide the Social Security number)
- State vital records offices
- Family members directly contacting Social Security at 1-800-772-1213
Here’s the critical part: Social Security payments made after death must be returned. As Michael Ruger notes, “Payments are typically due back if they were made for the month after the person passed. For example, if someone dies in June, the July payment (received in July for June’s benefit) must be returned.”
Pension Payment Rules After Death
Like Social Security, pension plans don’t automatically know when a beneficiary dies. Family members must:
- Contact the plan administrator directly
- Provide a copy of the death certificate
- Complete any required paperwork for survivor benefits
If pension payments continue after death, they’re considered overpayments and must be returned. If the funds have already been withdrawn, surviving family members may be responsible for repayment.
Common Questions About Pension Benefits After Death
Let’s address some frequently asked questions about who gets pension after death:
Do pensions go to family after death?
It depends on the pension plan. Some pensions end completely at death, while others provide for payments to a surviving spouse or dependent children. The duration of these payments varies based on the specific plan provisions and options selected.
Can a grown child collect a parent’s pension?
Generally, adult children cannot inherit a parent’s retirement benefits when the parent dies. However, there are exceptions:
- If the parent selected a period certain annuity and named the child as beneficiary
- If the pension plan has specific provisions for non-spouse beneficiaries
- If the adult child is disabled, they may be eligible for Social Security benefits (though not the pension itself)
Are pension death benefits taxable?
Generally, pension death benefits are not taxable because the money in the pension has already been taxed. However, if the payout amount exceeds the “value of the contract,” the excess may be taxable. It’s always advisable to consult a tax professional about your specific situation.
How to Claim Pension Benefits After a Death
If you’re a beneficiary needing to claim pension benefits after someone’s death, follow these steps:
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Gather necessary documents: Death certificate, the deceased’s Social Security number, pension plan information, and your identification.
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Contact the pension administrator: Reach out to the employer’s HR department or the pension plan administrator directly.
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Complete required paperwork: Submit all required forms, including a certified copy of the death certificate.
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Understand your options: Depending on the plan, you may have choices about how to receive the benefits (lump sum vs. periodic payments).
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Consult financial and tax advisors: Get professional guidance on the tax implications and how to manage the benefits.
Essential Considerations for Planning Ahead
If you have a pension and want to ensure your loved ones are protected, consider these tips:
1. Review Beneficiary Designations Regularly
Life changes like marriage, divorce, births, and deaths should trigger a review of your beneficiary designations. Ensure they reflect your current wishes and family situation.
2. Understand Your Pension Plan Options
Before retirement, understand all available options for survivor benefits. Some choices, once made, cannot be changed after retirement begins.
3. Consider a Period Certain Option
If you want to ensure benefits for non-spouse beneficiaries like children, a period certain annuity option might be appropriate. This guarantees payments for a specific timeframe, even if you die before that period ends.
4. Document Your Pension Information
Keep detailed records of your pension plans, including contact information for plan administrators, account numbers, and beneficiary designations. Store this information where family members can find it.
5. Seek Professional Guidance
Pension decisions can be complex and have long-lasting financial implications. Consulting with a financial advisor who specializes in retirement planning can help ensure you make the best choices for your family’s financial security.
Conclusion
Understanding who gets pension after death is crucial for both pension holders planning their retirement and beneficiaries dealing with a loved one’s passing. While spouses typically have priority rights to pension benefits, the specific provisions of the pension plan, beneficiary designations, and the type of payout option selected all play important roles in determining who receives benefits and how much they’ll get.
By taking time to understand your pension options and keeping your beneficiary designations updated, you can help ensure financial security for your loved ones after you’re gone. And if you’re dealing with a loved one’s pension after their death, don’t hesitate to seek professional guidance to navigate this complex process during an already difficult time.
Remember, the most important step is simply to start the conversation and planning process now, rather than leaving your loved ones to figure things out during a time of grief.
A Step by Step Guide
As the personal representative administering the estate, once you have identified all of the pension plans held by the deceased your first action will be to contact each pension provider, or pension administrator if it is an occupational pension scheme, to inform them that the member has died. At that time you will want to establish the following details:
- The value of the plan on the date of death
- Did the person who died get any money from their pensions before they died?
- Check to see if the plan got a transfer value from another pension plan within the last two years.
- List of any nominations the member made before they died
- Have there been any contributions that are too big in the two years before the death?
The reasons you will need this information are explained in more detail below:
If the deceased died before their 75th birthday, one of your core duties will be to assess whether the member has built up pension benefits during their lifetime that exceed the Lump Sum and Death Benefit Allowance of £1,073,100 and what tax free lump sums the member received from their pensions during their lifetime.
You will also need to check whether they had registered for Lifetime Allowance Protection as this may increase the tax free lump that can be paid to beneficiaries.
Any tax-free lump sums given to the dead person while they were still alive will need to be taken away from the Lump Sum and Death Benefit Allowance.
In some circumstances there may be an income tax charge payable if this limit has been exceeded and benefits are paid out as a lump sum following death.
Generally, pension plans do not form part of your estate when you die and are free from Inheritance tax. However, if the member transferred money between pension funds in the two years prior to their death and were in poor health at the time of the transfer with a reasonable expectancy that they may not live for a period of two years following transfer, H M Revenue and Customs may include the pension plans in the assessable estate for Inheritance Tax.
As personal representative, applying for Probate, you will be asked this question on the probate application forms.
After April 20, 2027, most pension funds will be taxed as part of your estate when you die. HMRC are consulting on how the inheritance tax should be collected and this will potentially change the duties of Personal Representatives.
Typically, pension providers ask plan holders to nominate one or more beneficiaries when they take out a policy, so there is no question as to who they would like to receive the benefits when they die.
It is worth noting that the provider is not bound by the nomination, and can consider payments to other individuals, particularly if there is no surviving spouse or financial dependant.
As the personal representative of the estate you may be asked if there are other people who should be considered as a potential beneficiary of the pension funds by the pension provider.
Defined Benefit Occupational Pension Schemes work a little differently because the rules of the scheme usually decide who can get benefits when a member dies.
Step 2 – Complete a Lifetime Allowance Assessment
As we have already mentioned, if the deceased died before their 75th birthday, the personal representatives are responsible for establishing what level of Lump Sum and Death Benefit Allowance is available so that they will know if any income tax will need to be paid by beneficiaries who receive their inherited pension benefits as a lump sum payment.
If the deceased took benefits from some or all of their pensions before they died the personal representatives will have to gather information on how the benefits were paid.
In addition, if the deceased took benefits from their pensions before 5 April 2024 the personal representatives will also have to establish how much of the now defunct Lifetime Allowance was used up by each payment.
Depending on the number and types of pension plans held this can be quite a daunting task and you may need to take advice from a qualified independent financial advice firm, such as The Private Office, to help you with this task. You can get in touch with us today and arrange a free initial consultation.