Pension: This is what could happen to your private pension arrangement when you die

Pension arrangements are planned by many for a number of years in order to pay out a comfortable sum to enjoy in the later stages of life. However, for many, securing this income for not only themselves, but those they love, is of the utmost importance, and many are already making arrangements for after they pass away. For those who have private pension savings, though, this process can often become complicated and difficult to arrange.


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It is clear that what a person’s loved ones receive is entirely based on the way they chose to manage their pension pot when they were alive.

For those looking to secure a certain future for their family and friends, planning ahead is key. spoke to Peter Glancy, Head of Policy, Pensions and Investment at Scottish Widows, who provided further insight into the matter.

Mr Glancy explained that for the small minority on a final salary pension scheme, the plan was quite simple to understand.

An employer pays an individual a set income until they pass away, and it is also likely the person’s spouse will then receive 50 percent of that income until their death, also. 

However, from then on there is nothing left in the estate for inheritance, and so the arrangement comes to an end. 

For this reason, those who have this kind of scheme often have to make alternative arrangements for their loved ones.

The circumstances, though, can become more complicated with other arrangements.

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Mr Glancy said: “If you are in a modern scheme, for example a personal pension or occupational defined contribution scheme, you will build up a pot of money.

“Let’s say you have a pot of £200,000 when you retire. At the moment, you have two choices: an annuity or a drawdown.

“If you choose an annuity, it gives you income for the rest of your life. But if you don’t live very long, you might not get all of that, and then nothing goes to your family.

“But equally if you were to live longer, you could get £400,000 worth of income. You don’t have to worry about running out of money with this kind of arrangement, but there is nothing to pass on to your dependents.

“However, if you go into a drawdown product, that money continues to be invested on your behalf. You can take money out in whatever pattern you want, and the money invested will go up and down in value.


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“You have risks, though. One is the amount of money you are spending could run out before you pass away. But if, for example, you are in ill health, then that pot will get passed on to your dependents.

“The important thing to remember is that investments could fall in value, so it is important to manage your investment risk and longevity risk.”

Mr Glancy explained that the best option in present times is to split savings between income drawdown and an annuity. 

When doing so, there are two models to consider, with one safeguarding money for loved ones, and the other prioritising the individual saver.

He added: ‘What most people want is a bit of certainty and a bit of flexibility. You may want to split this to run an annuity and a drawdown parallel to one another – this is what I call a horizontal split.

“But then you could go for a vertical split, where you choose an income drawdown product for the next five or ten years, but then target having 50 percent of that pot still remaining once you get to a certain age.

“However, you should bear in mind that if you take an annuity for the second half, there would be nothing to pass on to your dependents.”

The Pension Advisory Service states that those who choose income drawdown are likely to protect their beneficiaries after their death.

The service states that as long as benefits are paid within two years of the scheme becoming aware of someone’s death if passing away before the age of 75, then benefits are paid tax free. 

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