A question expats married to a foreign spouses often ask is if their partners will inherit their UK pensions should they die before them.
Expats can have a mix of pensions in retirement– workplace schemes, private funds, a Qualifying Recognised Overseas Pension Scheme (QROPS) or the state pension.
The state pension is easy to resolve.
The new state pension, which started from April 2016, is based on an individual’s national insurance history over their working life, so a spouse cannot inherit the pension because it is not related to them.
Some people may have an entitlement under the old state pension, and if some of this can be inherited will vary from person to person.
Key birthday for tax
Workplace schemes typically come with a spouse’s pension based on a portion of the full payment but the details will depend on the fund terms and conditions.
If the spouse is nominated as a beneficiary, the pension should be paid automatically.
The payment stops when the surviving spouse dies, so children or other loved ones cannot inherit.
To get around this, transferring out of the scheme to a personal pension is favoured by some savers.
QROPS and UK defined contribution pensions – which cover most private pensions and self-invested personal pensions – have specific inheritance rules.
The retirement saver’s 75thbirthday is the key date.
Rule for the under 55s
If the saver dies before then, a spouse should inherit any unspent funds tax-free. Tell the provider that you want your spouse to inherit and the money goes to them outside of probate and the rest of the estate.
After the 75thbirthday, the surviving spouse can draw the cash as an income and income tax is paid at the spouse’s marginal rate on the funds they draw. Again, nominate your spouse as the beneficiary with your provider.
A point to note is the age of the surviving spouse is not relevant – only that of the deceased retirement saver to indicate if the fund passes on with or without tax.
That means they do not have to wait until they reach 55 years old to draw an income from the pension fund.