Your pension isn’t just a retirement fund; it’s the result of a lifetime of hard work. Planning for its fate after you’re gone is vital. In this guide, we’ll explain how you can ensure your pension benefits the right people, how they can use it, and how to minimize the tax burden.
1. Designate a Beneficiary
Your pension’s destiny depends on your pension scheme. In a defined contribution scheme, you can nominate beneficiaries to inherit all or part of your pot. Document this in an “expression of wishes,” which should align with your will. Although not legally binding, pension providers typically follow it unless there’s a valid reason not to.
2. Types of Pensions: Defined Contribution vs. Defined Benefit
Understanding the difference between these two pension types is crucial. Defined contribution schemes allow beneficiaries to receive a lump sum or set up a drawdown account for flexible access. Defined benefit schemes usually continue providing income to surviving spouses or nominated dependents.
3. Explore Inheritance Options
Most beneficiaries have choices on how they receive inherited pension money. They can opt for a cash lump sum or maintain it in a “beneficiaries drawdown account,” offering flexibility. Confirm available options with your provider, as the beneficiary drawdown can be advantageous for passing on pension savings to future generations.
4. Passing Wealth to Generations
The abolition of the pensions lifetime allowance means there’s no cap on tax-free pension savings. This can significantly impact your descendants’ financial future. If you pass away before age 75, benefits left in a defined contribution pension are often tax-free, making it a viable option for multi-generational wealth transfer.
5. Managing an Inherited Pension
Once you inherit a pension, you have choices. Leaving it invested in the stock market can be a simple approach, but it’s subject to market fluctuations. If retirement is near, consider cashing out sooner.
For more control over investments, transferring the funds to a “self-invested personal pension” (Sipp) allows you to choose where to invest. This option is similar to managing a stocks and shares ISA.
Alternatively, if you’re of retirement age, purchasing an annuity guarantees a lifelong income. While current annuity rates are attractive due to higher interest rates, it’s essential to weigh the pros and cons.
Planning for the fate of your pension after your passing is as crucial as other aspects of estate planning. By designating beneficiaries, understanding your pension type, exploring inheritance options, and considering multi-generational wealth transfer, you can ensure your pension benefits your loved ones optimally. Managing an inherited pension wisely will secure your legacy for generations to come.