SAVING into a pension ensures you have access to money when you hit your golden years, but you could also end up with support from your partner’s retirement pot.
Here is what happens to your partner’s pension when they pass away.
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People are living longer so are spending more time in retirement but couples may eventually find one of them dies and leaves behind money in their pension.
Deciding what to do with this cash may sound morbid but it is an important part of retirement planning and ensures funds end up in the right place.
A pension is treated separately from other assets when a person dies.
Typically, inheritance tax needs to be paid on any assets worth more than £325,000, although spouses can pass wealth and property to eachother without worrying about the tax.
There are different rules when it comes to inheriting pensions and it will depend on the age your partner passed away and the type of product.
Private pensions
Most people have money in private pensions, also known as defined contribution schemes, these days.
These are schemes that may have been setup at work or could also be a self-invested personal pension (SIPP) that your partner managed themselves.
They should have completed an expression of wish form or nomination of beneficiaries letter when they started the pension to say where they wanted any money to get when they die.
If your partner died before age 75 without accessing the pension then you can usually get the money as a cash lump sum or keep it invested for your retirement using a product known as income drawdown.
Another option is to use the money to purchase an annuity, which is a retirement product that pays you a set income for life.
How to make sure your pension is left to your loved ones
Helen Morrissey, senior pension and retirement analyst at Hargreaves Lansdown, reveals how to make sure your pension goes to the right place when you die.
Keep expression of wish forms up to date for all the pensions you accumulate over your working life. This is especially the case if you cohabit with someone rather than get married.
Contrary to popular belief there is no such thing as common-law marriage and people can live together for many years and not have the same rights as a married couple.
This means cohabiting couples may not get the benefits they were expecting should their partner die – keeping these details up to date is crucial to avoid financial hardship.
If you are in a relationship and have chosen an annuity to take your retirement income then ask yourself what your partner would be left with if you were to die first.
If you have the lion’s share of the pension’s savings, you can consider taking a joint, rather than single life annuity.
While the income on a single life annuity is higher your spouse will be left with nothing when you die.
Named beneficiaries typically have two years to claim these payments before tax can be charged.
It gets a bit more complicated if your partner already started accessing their pension before age 75.
Any cash already taken out of the pension that is in their bank account will form part of their estate for inheritance tax.
But any money still in the pension can be accessed as a lump sum, through drawdown or as an annuity without any tax to pay.
Things get a bit more difficult if your partner dies after age 75 as you will need to pay tax on any income you take out of their pension.
You are also unlikely to get any money, whatever their age, if they have already took out an annuity unless they had a joint-life product which means the remaining partner continues to receive the income.
Final salary schemes
Some people may have ‘gold-plated’ final salary or defined benefit schemes.
These are old-fashioned pensions that payout a set amount when you retire depending on how long you worked for a company.
They are less common nowadays as they have proved expensive for company’s to maintain.
Similar to defined contribution schemes, your partner will have named a beneficiary when they joined the pension and you may receive a “survivor’s pension” or other payouts.
These payments are only tax-free if your partner died before age 75 or you need to pay income tax on the amount your receive.
In some cases, dependants such as children may be sent payments.
It is best to contact your partner’s company or pension scheme manager to see how payments are made.
State pension
You may be able to inherit your partner’s state pension depending on when you married, your age and how old they were when they died.
If your spouse reached state pension age before April 6 2016 – when the new state pension came in – they might have built up something called additional state pension.
A portion of this can be passed onto a spouse when you die.
You could also have something called a protected payment. This is when people built up more state pension than the maximum amount of the new state pension before it was introduced.
If your partner’s basic state pension and additional state pension would have paid more than the new state pension, then the excess is your protected payment.
It is not possible to do this under the new state pension rules that were introduced on April 6 2016 as any entitlement is now based on your individual national insurance record.
You can check what you are entitled to on the Gov.uk website.
Read our guide on how to make sure your pension goes to your loved ones when you die.
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