A worry for expats is what happens to any unspent cash in their pension pot when they die.
The good news is many pensions continue paying your financial dependants – and if you have none, they will pay the balance left in your fund to your estate.
Expats need to know what sort of pension they have, as the benefit levels for dependants vary between schemes and if you have started drawing down on the fund or still pay premiums.
Expats also have concern is about how much tax loved ones and relatives might pay on the savings they leave.
Learn more about the details of expats pension.
Leaving A Pension After Death
The pension administrator has the final say about what happens to your pension fund when you by following a set of rules.
The rules are different depending on if the scheme is defined benefit (DB) or defined contribution (DC), if you are still saving or if you have started drawing on your fund.
A DB pension is typically offered in the workplace and provides a guaranteed income with cost-of-living increases each year. Income is based on length of service and final or average salary.
A DC pension can be a workplace or personal pension, including offshore options like a QROPS (Qualifying Recognised Overseas Pension Scheme) or SIPP (Self-invested Personal Pension). Income in retirement comes with no guarantees and is based on the value of the fund.
Find out more about the pension designed for expats called QNUPS.
DB pension death benefits
How the fund pays out depends on where you are in your retirement journey
If you die while saving
Workplace DB pensions generally include life cover that pays out to as tax-free cash. How much is tied to a percentage of your salary or pensionable earnings. Your family may also get a premium refund.
Some DB schemes have a spouse’s pension and may even pay dependent children.
If you die without taking benefits after leaving the scheme
Most DB schemes will only refund your contributions plus interest, while some are more generous, paying your spouse or dependent children.
If you die after retirement
Life cover will stop on retirement, although some schemes will pay your spouse a ‘pension protection lump sum death benefit’. This amount is the balance left after taking away the benefits you have received from the pension value when you retired.
Some pensions are guaranteed to pay out for some time after death, which means if you died two years into a 10-year guarantee, your dependants would receive the remaining eight years of benefits.
DC pension death benefits
DC pension benefits tend not to be as generous as DB schemes.
If you die while saving or leave the scheme without taking benefits
Typically, the pension is worth the value of the fund on death without any enhanced benefits.
If your dependants claim the money within two years of your death before the age of 75, the money is paid as a tax-free lump sum. Your dependants can buy a tax-free annuity with the cash which gives a guaranteed income for life.
If you die aged 75 or older, the amount is taxed at the beneficiaries’ marginal rate of income tax.
If you die without taking benefits after leaving the scheme
Most DB schemes will only refund your contributions plus interest, while some are more generous, paying your spouse or dependent children.
If you die after retirement
Any life cover attached to the pension will likely stop when you retire.
If you have opted for income drawdown, your beneficiary can continue the arrangement.
Again, if your beneficiaries claim your unspent fund within two years, should you die before the age of 75, they get the money tax-free.
If you die aged 75 or older, the amount is taxed at the beneficiaries’ marginal rate of income tax.
Unspent Pension Ready Reckoner
Here’s a chart breaking down how an unspent pension fund is treated for tax:
| Payment | Type | Age at death | Tax due |
|---|---|---|---|
| Most lump sums | Defined contribution or defined benefit | Under 75 | None |
| Most lump sums | Defined contribution or defined benefit | 75 or over | Income Tax deducted by provider |
| Trivial commutation lump sums | Defined contribution or defined benefit | Any age | Income Tax deducted by provider |
| Annuity or money from a drawdown fund set up or converted and first accessed from April 6, 2015 | Defined contribution | Under 75 | None |
| Money from an old drawdown fund – a ‘capped’ fund or a fund first accessed before April 6 2015 | Defined contribution | Under 75 | Income Tax deducted by provider |
| Annuity or money from a drawdown fund | Defined contribution | 75 or over | Income Tax deducted by provider |
| Pension provided by the scheme | Defined contribution or defined benefit | Any age | Income Tax deducted by provider |
What Happens To A Pension When An Expat Dies FAQ
Here are the answers to some of the most asked questions about what happens to the money in a pension when an expat dies.
Technically, the two-year rule is not from the date of death but from the date the pension provider was told of the death, which can make a big difference in timescales for the family of an expat dying overseas
If the retirement saver was aged below 75, then the beneficiaries pay income tax at their marginal rate on an annuity or drawdown from an ‘untouched’ pot – which is one with no money paid out. Any lump sums paid are taxed as well.
The current lifetime allowance (LTA) is a £1.073 million cap on all UK pensions. The limit does not apply to a QROPS. If the fund exceeds the LTA, beneficiaries pay 55% tax on a lump sum or 25% on any other payments.
Not usually, because pension funds are discretionary and are outside the estate for calculating IHT.
DB pension pots can only go to a dependent of someone who dies, typically a spouse, civil partner or child under 23. If someone else inherits, the money is usually taxed at 55%.
Inherited DC pension pots – such as QROPS – can pass to someone nominated by the beneficiary on their death, providing the cash is in a flexi-access account before the first beneficiary dies.
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