What to do about someone’s pension when they’ve died

The death of a loved one can be an extremely emotional and stressful time for all concerned, and it also comes with a lot of financial admin – including when you’re sorting their pensions.

Pension inheritance rules can be beneficial to remaining husbands, wives or civil partners – but there are a lot of rules to keep track of, and you might wonder whether you’ll get their personal or state pension payments. Children of the deceased can benefit, too.

Here, Telegraph Money explains what happens to someone’s pension when they die, and what steps you need to follow to benefit if you’re eligible.

In this guide we will cover:

• What happens to a pension when someone dies?
• What to do about their state pension
• What to do about their personal and workplace pensions
• Claiming a deceased parent’s pension
• How are pensions paid to beneficiaries?
• Pensions and inheritance tax
• What is the “lifetime allowance”?
• Considerations and FAQs

What happens to a pension when someone dies?

The money you save while you’re working goes into a pension to fund your retirement. Whatever’s left when you pass away can be transferred to your beneficiaries, but how it works will depend on a host of factors, including the type of pensions the person held, and how old they were when they died.

When it comes to dealing with their affairs, one of the things you will need to address is any pensions they had. It’s important to do this with care, given that the person has spent their life working hard to build that pot – or pots.

Broadly speaking, a private pension will not be considered part of someone’s estate, which can be beneficial when it comes to inheritance tax and passing it to heirs. 

However, if the pension was used to buy an annuity, the heirs will usually receive nothing as part of the agreement – though there are specific types of annuities that will continue to make payments to beneficiaries even after death.

The rules are different when it comes to the state pension, which we explain more below.

What to do about their state pension

If your partner or loved one was receiving state pension payments, you need to inform the Pension Service that they’ve died, so that payments will stop. For contact details, head here. 

You can also make use of the “Tell Us Once” service, which lets you report a death to most government organisations in one go.

Claiming their state pension

In the event of a partner’s death, the surviving spouse may be entitled to receive their partner’s state pension, or an uplift to their own. 

This could include an enhanced basic state pension (more on this below), an inherited additional state pension (also known as “Serps”), where widows could inherit at least 50pc of their late husband’s additional state pension in addition to her own, or inheriting 50pc of any “Graduate Retirement Benefit” based on contributions their husband made in the 1960s and early 1970s.

Becky O’Connor, director of public affairs at PensionBee, said: “This will depend on certain factors, such as your age, whether you’ve reached state pension age at the time of death. The rules regarding spousal entitlement can vary.”

With this in mind, it’s advisable to contact the government-run Future Pension Centre for guidance on your individual circumstances.

As a partner, you may be entitled to extra payments from your spouse’s state pension. 

Under the “old” state pension system, if you are a married woman but haven’t paid sufficient contributions to get a full basic state pension in your own right, you may be able to boost your pot by using your partner’s National Insurance (NI) record.

You may be eligible for the “married woman’s rate” if your spouse retired before April 2016.

This rate is up to 60pc of your partner’s basic state pension. You can see if your partner’s contributions are relevant to you by visiting Gov.uk.

Note, though, that if you reach state pension age from April 2016 – and get the “new” state pension, your state pension will be based on your NI record only, so the “married woman’s rate” won’t apply.

Getting clarification on underpaid pensions

A cohort of people has been identified by the Department for Work and Pensions (DWP) whose pensions were underpaid because they didn’t get the automatic increase they were entitled to.

This includes individuals who were married or widowed when they died, as well as those aged 80 or over when they died. Many of those affected retired before 2016 under the “old” state pension system, who were owed uplifts in their pension when their husbands retired or died.

If you believe your partner – or parent – who died may have been underpaid, you can head here to request more information. 

What to do about their personal and workplace pensions

Generally speaking, if the deceased had any private pension schemes, such as a Sipp (self-invested personal pension), the remaining pot can be passed on to beneficiaries.

If they did, you will need to get in touch with the provider to find out how much they had slotted away – and what to do next. 

What happens will largely depend on the type of scheme they were part of, and the rules governing it. The same applies if you find the person had a workplace pension.

If you don’t know who the pension provider is, you can contact their employer to find out details. You can then find out how much is saved, and how to claim it.

Most occupational defined contribution schemes (more below) will have asked for a “nomination of beneficiaries”, a form which indicates who should receive the pension pot on death. 

Defined contribution pensions

With this type of pension, sometimes called a “money purchase scheme”, someone builds a pot with their own contributions, along with those from their employer, which is then invested on behalf of the individual.

Generally speaking, if the person dies before drawing this pension, the whole pot can be passed on to beneficiaries. 

Defined contribution pension pots are not legally part of your estate (and are therefore exempt from inheritance tax.) This also means that having a will in place does not cover the pension. 

Ms O’Connor said: “In this situation, having an up-to-date ‘nomination of beneficiaries’ form in place is important. This will name the people who should receive the pension, and in what proportions. This will make the process of identifying who should receive what from a pension much quicker and easier.”

More than one person can be named as a beneficiary so the pot can be split. In a scenario where there is no form, having a will can help set out your wishes.

Defined benefit pensions

There are different rules in place for this type of arrangement, also known as a “final salary scheme”.

This is where the pension is based on a person’s salary, and the length of time they’ve worked for their employer. These pensions are linked to an employment and are commonly found within the public sector.

With a defined benefit scheme, if the person died before retirement, a beneficiary would get a “death-in service” payment.

But if the loved one dies after having retired, and had begun drawing the pension, the spouse will only get a spouse’s pension. 

Note, though, that some schemes will also pay a small lump sum for a few years after retirement. This will depend on the specific terms of the scheme. 

Claiming a deceased parent’s pension

To be able to claim a parent’s pension fund when they die, you will need to be named as a beneficiary. 

Exactly who benefits tends to be dictated by what is known as a “nomination of beneficiaries” or “expression of wishes” form completed by the individual. 

Administrators and trustees will refer to this form when dealing with the pension of someone who has passed away – but it’s worth noting they are not legally binding contracts.

If, for example, your parent was part of a defined benefit workplace scheme, you may receive a pension from it. This will depend on factors such as whether you are still in full-time education. You need to check the rules of the particular scheme in question. 

It is often the case that defined benefit pensions will come with generous inflation protection. This will also be applied to any inherited pots.

How are pensions paid to beneficiaries?

Beneficiaries may receive the pension as a lump sum payment, or as regular payments over time. 

Ms O’Connor said: “This will depend on the terms of the pension, and the choices made by the deceased prior to passing.”

With a defined contribution private pension, for example, there are a few different options:

• Lump sum payment – enabling beneficiaries to get the whole value of the pension in a single lump sum
• Lifetime annuity – means the beneficiary can use the pension pot to purchase an annuity, giving them a regular income for life
• Beneficiary drawdown – this flexible option enables the beneficiary to keep the pension pot invested and take out amounts as and when required

Pensions and inheritance tax

As mentioned above, pensions are very tax-efficient, and can often be passed on to beneficiaries completely free of tax. Generally speaking, a private pension (defined contribution), is outside of your estate for IHT purposes.

Jason Witcombe, chartered financial planner at Empower Partners, said: “It’s worth being aware that if you were to die before age 75, your beneficiaries would not even have to pay income tax on withdrawals from the inherited fund.”

The same may be true if the pension has already been accessed – or “crystallised” – and is inherited as a lump sum. But you need to be aware that inherited defined contribution pensions may not always be completely tax-free.

The tax treatment depends on how old the person is when they die, and whether beneficiaries take the money as an income or lump sum. You need to be aware that this is where the rules get complicated.

Until recently, any inherited pension that has not yet been accessed (“uncrystallised”) – and which is taken as a lump sum – is checked against the lifetime allowance.

Under the rules, if the lifetime allowance had been used up, income tax would be charged on the excess. But the rules are about to change (see below).

By contrast, if a person dies after age 75, things are a bit simpler, as any withdrawals a beneficiary makes from the pot will be subject to their marginal rate of income tax. This will be applied to the entire pension, irrespective of whether it’s inherited as a lump sum or as income. 

What is the lifetime allowance?

The Government confirmed its commitment to abolishing the pension lifetime allowance – a move which had been announced in the Spring Budget in 2023. 

This allowance set a £1.073m cap on the amount that can be saved in pensions tax-free, with tax charges levied for pensions which exceed the limit. 

The scrapping of this allowance is set to go ahead in April 2024. 

That said, the lifetime allowance has become a bit of a political football, and Labour has stated that if it gets into power, it will re-introduce this allowance. 

Considerations / FAQs

If my husband dies, do I get his state pension?

When your spouse passes away, you may be entitled to receive his state pension.

This will depend on a host of factors, including your age and whether you’ve reached state pension age at the time of death. You need to be aware the rules regarding spousal entitlement can vary.

As described above, if your spouse retired before April 2016, you may be eligible for the “married woman’s rate” – where you can boost your pension by using your partner’s NI record. This rate is up to 6pc of your partner’s basic state pension.

However, state pensions where the deceased partner became eligible after April 2016, are not transferable.

Ms O’Connor said: “This was the date when the system transitioned from the old ‘basic’ system to the ‘new’ state pension, and entitlements became dependent solely on the individual’s contribution – and not contributions by a spouse.”

Can a child collect a deceased parent’s pension?

In many cases, a child can claim a deceased parent’s pension. That said, eligibility – and the process – vary depending on the specific pension scheme. 

Ms O’Connor said: “Typically, to claim a deceased parent’s pension, the child would need to provide relevant documentation, such as proof of relationship, the parent’s death certificate, and possibly other forms of ID.”

How to trace a lost pension

If you can’t find any details of a loved one’s personal or workplace pension, but believe they had one, the Pension Tracing Service may be able to help. You’ll need to know the name of the employer or pension provider in order to use the service.

Seek help

Given the complexity of pensions – and particularly when it comes to passing the pot on to loved ones – it can make sense to speak to a professional. 

This will help ensure the pension wealth is passed on in accordance with the wishes of the deceased – and that it is done in the most tax-efficient way possible.

To read more about finding a good financial adviser, head here.