It is an interesting question, what happens to your pension annuity, your retirement income, if you die early in retirement, or if you die before reaching retirement. Different pension schemes have different rules on this issue.

Final salary pensions, sometimes called defined benefit schemes, are the top tier of company pension schemes. Sadly, these schemes are not as common these days as they used to be. Few new employees will be offered them these days. If you die before drawing your pension, most schemes will pay up to a maximum two-thirds of the likely pension you would have got if you had worked with the company until retirement. Many will also pay a death-in-service benefit to a maximum of four times your annual salary.

These payments can go to your husband, wife, any dependent children, or nominated beneficiaries. Scheme rules do vary, though.

These days, most employees are now in money-purchase, or defined contribution, pension schemes, and will use their pension pot when they retire to purchase a pension annuity. You might die before getting that far. If so, your scheme should return the value of your fund at time of death, including employer contributions, tax relief and any growth. Some employers may also offer death-in-service benefits as well.

Premature death with stakeholder and personal pensions…once again, you get your money back, or rather your survivors do, in the form of a lump sum known as “return of fund”. This will include all your contributions, tax relief and any growth. The same goes for members of group personal pensions.

With state pensions, if you’re single, your state pension dies with you. If you are married, and your partner is over 45, they may be able to claim a £2,000 refund lump sum, then the full basic state pension for up to 52 weeks, currently £90.70 a week.

If you’re simply cohabiting, your partner won’t get a penny. This spells disaster for couples who have lived together for years, only for the main breadwinner to die young.

There are some things you should consider doing, regardless of the type of pension scheme you have. When you take out a scheme, you should make an expression of wish, setting out your beneficiaries.

You should also consider writing your plan into trust, setting out exactly who you want to get the money. If you don’t, any payout could end up being decided by probate, which, as we all know, could take months. You should also write a will (and keep it updated), to make sure your wishes are clear and legally enforceable.

The best thing you can do if in doubt is to seek professional advice. Premature death, whether before drawing your pension annuity or after, is a major financial issue. Maybe not for you, but for your dear ones you leave behind.

This entry was posted on Thursday, August 28th, 2008 at 8:21 am and is filed under General, Ill health. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.