9 Bereavement and pensions
In the UK usually around 600,000 people die each year. For many people left bereaved this will mean less money coming in.
If you lose your partner – either before or after starting to draw a private pension – there are financial consequences for the remaining family members.
For private pensions (both workplace and personal) entitlement to the pension savings and/or income of the deceased person are normally defined by tax regulations, the pension provider’s rules for their fund and by the ‘expression of wishes’ - which are the instructions the deceased person had given to the provider.
The tax regulations set out who can benefit and what, if any, tax will be deducted. The fund rules define what proportions of the deceased persons assets and/or income can be passed to the declared dependant(s). The expression of wishes form sets out who those dependants are so make sure that your beneficiary details are kept up to date with your pension provider.
What happens to pension savings and income after death varies between defined benefit and defined contribution schemes. Broadly, the rules are:
Defined benefit schemes
- A pension can be paid to dependants (e.g. surviving partner, dependent children).
- Typically scheme rules set a surviving partner’s pension at between a half and two-thirds of the amount deceased member would have got or was getting.
- Schemes also often a have life insurance lump sum payable on death before retirement (e.g.2x or 4x the salary of the deceased person). This can usually go to anyone nominated and is tax-free.
Defined contribution schemes
- An undrawn pension pot can be left to anyone. This is tax-free if death is prior to the age of 75 and the money is received within two years of the pension provider being notified of the death. However the money is subject to income tax if death occurs at 75+ or if the money is paid more than two years after notification of the death. The same rules apply to pension savings which have previously been moved into a drawdown fund
- Where a pension pot has been converted into an annuity the exact rules will depend on the type of annuity that has been purchased. Any pension income that is passed on after death (e.g. in the case of joint life annuities) is subject to income tax
- If someone dies before they’re 75 a tax charge could result if the deceased person’s lifetime allowance for pensions has been exceeded.
These rules are quite complex. Further details can be found via this link:
The state pension, by contrast, usually ends when a person dies and this can’t be passed on. The exception to this rule is where protected payments were being paid to the partner before death. Rights to 50 per cent of protected payments may be available after bereavement.
Facing up to the challenges of life in retirement after losing your partner is something we should all plan for however much we might tend to shy away from preparing for it.
In addition to checking the expression of wishes arrangements and the rules for pensions for dependents for any private pensions two other things should be done:
- Be aware of the tax issues relating to your pension assets and those of your partner, taking financial advice if necessary.
- Think about how you might cover household expenditure if you were to lose your partner. The costs of running a home don’t halve even if income does. This may place financial pressures on you.
You don’t normally need to worry about putting your wishes about your pension(s) into your will. These wishes about the beneficiaries of your pension assets should already have been supplied to your pension providers and will be acted upon by them after your death.
Regardless of whether you do find yourself in financial difficulties if you lose your partner you should check if you are entitled to support through Pension Credit (if you are over state pension age) or Universal Credit (if you are under state pension age). If you are entitled to receive them do make sure you claim these state benefits. Many people do not claim and miss out on money that would help them in retirement. Getting Pension Credit can also open the door for entitlement to other financial help including support for housing costs and assistance with health and heating expenses.
You could also be entitled to a grant to cover funeral expenses as well as Bereavement Support Payments. Again, make sure you claim these state benefits if you are entitled to them. Links are provided at the end of the course if you need more information on these benefits.
Activity 6 Bereavement and spending changes
How do you think your household spending would change if you were to find yourself living alone?
You would find that some items of expenditure remain the same but others, like spending on food and drink, would fall.
Many of the costs of running a home are fixed and are not affected by how many people live together. This includes mortgages or rent, car and home insurance as well as home and garden maintenance.
But some costs which might seem to be fixed can fall. A discount on Council Tax (or Rates in Northern Ireland) does apply for one person households – but only at 25% in England, Scotland and Wales. In Northern Ireland a 20% discount applies to rates for single householders aged 70 or over. Similarly water companies offer single occupancy discounts. Fuel costs might be lower – but not 50% lower and the same applies to the costs of running a car.
Have a look through the bills you pay each year – how many of those will fall by 50% if there was only one of you? How many will be unchanged? How many will fall by a proportion less than 50%?
Making sure that you, or your partner, are provided for if one of you dies is an important exercise. In the following section we look next at setting wills and planning for care in later life.