Understanding workplace pensions when employees pass away

A beneficiary nomination form is the simple solution, but many people aren’t currently aware of what happens to their savings.

Workplace pensions are a big part of many people’s overall financial wealth and wellbeing. They might be their biggest asset after their home – and if they’ve been saving for years, their pension could be worth much more.

Yet too many people don’t know what happens to their workplace pension savings should they pass away. They might assume the pension will be passed on automatically, but some actions must be taken to ensure it goes to the right place in a timely way.

They need to fill out a beneficiary nomination form with their pension provider because they can’t rely on a will when it comes to pensions, or risk intestacy where they don’t have a valid will at all.

Consumer champion Martin Lewis recently highlighted the extent of the problem and urged people to sort out their pension admin in case they pass away.

It’s more than enough to cope when someone dies without the added stress of a loved one finding out their late spouse’s ex-partner benefits because of out-of-date information, for example. Or that children from a new marriage aren’t mentioned.

The impact on families and friends left behind can be devastating – and it doesn’t have to be.

What employees need to do

The good news is that it’s usually very simple to sort out with a little bit of planning. All employees need to do is nominate a beneficiary for their pension savings, whether that’s family, friends or charities – it’s their choice.

Unlike the state pension which is a benefit only paid to those who are eligible while they’re alive, most types of modern, flexible, defined contribution workplace pensions can be passed on.

If the pension saver is under 75 when they pass away, this is normally tax free up to a value of £1.073 million and sits outside inheritance tax. Over 75 and beneficiaries pay income tax on whatever they get. If children are beneficiaries under the age of 18, a legal guardian can help them access the money.

Different rules apply to annuities and final salary ‘defined benefit’ pensions, and it makes sense for everyone to get to know their pension so that they can make plans for them and their loved ones.

3 ways to help employees plan their pension

Encourage them to understand and build their confidence about their pension, and how their pension provider can help with straightforward communication and support.

A workplace pension is a pot of money they build up and it can normally be passed on.

There are, though, some types of pensions which don’t work like this, so it’s even more important for people to know what type of pension they have and take financial advice if they need to.

Give clarity that employees need to let their pension provider know about their wishes.

Death in service benefits are normally made in a separate instruction, and workplace pension instructions are made directly with the pension provider.

Get them to sign up to their provider’s pension app. It makes it simple to manage their pension and review their pension beneficiaries on a regular basis every year or two, or when their circumstances change.

All they need to do is fill out a beneficiary form and normally this can be done in an app, or online. They can keep up with how much they’re saving, too.

Find out more at gov.uk or take a look at the financial planning sessions on the Scottish Widows YouTube channel here.