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Money, tax and benefits
What happens to your company pension when you die
There are different kinds of company ('occupational') pension scheme, and the scheme rules vary from company to company. What happens to your pension when you die depends on what type of scheme you have, its rules and whether you've already retired.
The two main types of company pension scheme
Final salary (or 'defined benefit') scheme
The amount you get is based on your salary and the number of years you've been in the scheme.
Money purchase (or 'defined contribution') scheme
The amount you get is based on how much you and your employer have contributed and the interest, or growth, that has been earned.
At retirement, the money you've built up in your fund is used to provide your pension, often by buying an annuity (an investment from an insurance company which guarantees to pay you a regular income for life).
If you die before retirement – final salary schemes
What happens to your pension fund will depend on whether you're:
- an 'active member' – you're still making contributions
- a 'deferred member' – you've stopped making contributions (for example, you've left the company), but haven't transferred your fund to another scheme
Active members
Depending on your scheme's rules, a number of benefits may be payable, including:
- a return of all of your contributions, usually repaid without interest
- a tax-free lump sum of up to four times the salary you were getting at the time of your death
- a pension for your spouse, civil partner or another dependant – often half, but as much as two-thirds of the amount you'd have got at pension age (as stated in the scheme's rules)
These are maximum benefits, and many schemes pay lower amounts, so it's advisable to find out from your scheme administrator exactly what your scheme provides. Most schemes provide benefits for your spouse or civil partner, but if you have a partner and aren't legally married or in a civil partnership your scheme may not recognise them.
Deferred members
If you're a deferred member, your dependants often have fewer rights to benefits than if you were an active member, but again this depends on your scheme's rules.
Sometimes your dependants will only get a refund of the contributions you've paid, without interest. But if the scheme is providing benefits instead of the State Second Pension and you're married or in a civil partnership, an income must be provided for your spouse or civil partner.
Some schemes are more generous and pay up to two-thirds of your pension to your spouse or civil partner.
If you die before retirement - money purchase schemes
With money purchase schemes, the rules are usually the same whether you're an active or deferred member.
Your pension fund will be refunded to your chosen beneficiary or your estate. If the scheme is contracted-out of the State Second Pension, some of the benefit will usually be used to provide an income for your spouse or civil partner.
There will often be a lump sum benefit provided by insurance cover too, but schemes vary widely and it's advisable to check with your scheme administrator to find out exactly what your scheme provides.
'Expression of wish' forms
When you join a company's scheme, you'll probably be asked to fill in an 'expression of wish' form. This states who you'd like any lump sum benefits to be paid to.
The trustees of your scheme will usually make the final decision about who receives your lump sum benefits. They'll usually follow what you've requested on your form, so it's important to amend it if your circumstances change.
If you die after you've retired
Most pensions have a guarantee period of five (or less commonly, ten) years. If you die within that time, the balance of the guarantee period is paid, sometimes as a lump sum, to the person you nominate or to your estate.
There may also be a pension payable to your husband, wife or civil partner, usually for the rest of their life. Some schemes provide pensions for partners who aren't married or in a civil partnership, but not all do so, so it's important to check what your scheme provides.
Final salary schemes
The rules of your scheme will tell you whether there's a pension for your partner and if so, how much. In most schemes, it's around half, but it can be as much as two-thirds.
Money purchase schemes
If your fund is used to buy an annuity, you can usually choose the level of pension payable to your partner if you die - up to a maximum of two-thirds of the maximum pension the scheme could have provided for you.
Where to get help and advice
Trustees
Your scheme's trustees have a duty to look after the members' interests or, if a member dies, their dependants' interests, so they, or the scheme's administrator, should be able to answer any questions you have.
Independent financial adviser (IFA)
For independent advice, you could talk to an IFA. You may have to pay a fee, so it's best to check beforehand.
The Pensions Advisory Service
If you're not satisfied with the trustees' advice, or if you have a complaint, The Pensions Advisory Service can offer independent guidance.
The Pensions Ombudsman
The Pensions Ombudsman can investigate complaints about the running of pension schemes, or disputes about trustees' decisions.
The Pensions Regulator
If you're worried about the way your company pension scheme is run, you can contact The Pensions Regulator.
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