Nobody wants to think about dying, but if you have a spouse, civil partner or live with someone, you may wish to think about what happens to them, if you die.

While civil partners have the same rights to pension death benefits as husbands and wives, co-habitees of the same or opposite gender do not automatically enjoy any rights. This means that you need to think very carefully about what will happen when you die.

Death before ‘retirement’ / drawing benefits
The type of pension scheme you are a member of will determine what happens. For those in ‘final salary’ (technically called defined benefit) schemes, there is usually a provision for a widow’s or widower’s pension and there may also be a lump sum death benefit of up to 4 times salary.

This money will usually be paid at the discretion of the trustees, so it is important to make a ‘death benefit nomination’ telling them what you would like to happen. They do not have to follow your wishes, but will generally do so.

Because of this flexibility, any lump sums fall outside your estate for inheritance tax purposes, so this can help in some circumstances.

If you have a ‘money purchase’ (technically called defined contribution) scheme, either at work or on your own account, there will usually be a return of fund on death and this can be used as a (tax free) lump sum or to produce an income for a dependant, including minor children and some disabled people.

Again the scheme trustees may have discretion over how monies are applied, so you need to tell them, by lodging an ‘expression of wishes’.

Death after ‘retirement’ / drawing benefits
Once again, the type of scheme determines what will happen. In most ‘final salary’ schemes, there is an automatic payment of a reduced pension (perhaps two thirds of what the member was receiving) payable to a spouse or civil partner on the members’ death.

For money purchase schemes the matter is more complex, because it will depend on the decisions taken when drawing benefits. Many people will opt for an annuity which provides a widow’s annuity, but this may sometimes be inappropriate, if the spouse or civil partner is financially independent. In such cases, the initial annuity may be higher, but will die with the member.

Where Drawdown (known as an unsecured pension) has been selected, matters are more flexible (and complicated). Where benefits have not yet been ‘crystallised’ (converted into tax free cash &/or an income), part or all of the fund may be returned to the estate or paid to a nominated beneficiary free of income tax. Alternatively an annuity or other income can be provided for a surviving spouse or civil partner.

However, where part or all of the fund has been crystallised, a 35% tax deduction will be removed from any return of remaining funds. If, however, the monies are applied to provide a dependant’s income, then this is not separately taxed (but will be subject to tax on any income taken, in the normal way).

Once the member reaches age 75, if an annuity is not purchased matters take a further turn for the worse, because within the Alternatively Secured Pension regime that takes over then, any lump sum will be subjected to punitive tax charges that can reach as high as 82%, unless the money is given to charity. However, an income can continue to be paid to a legal dependant in the same way as within Drawdown.

As ever, it is important to take individual advice before making any decision regarding your finances. For further information, please contact Robert Bruce Associates.

The value of investments is not guaranteed and will fluctuate; you may get back less than you put in.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.