What happens to your money after you die?
What you do while you're alive has a huge bearing on how much of your cash your loved ones get - so read this before it's too late.
Death. It's not a nice subject, but it is important to put some thought and preparation into the way you organise your finances now, for when the time comes. A bit of research and work can make a big difference to just how much money your loved ones have once you're gone.
Let's start with a positive.
When you write a Will, one or more executors will be named - these are the people in charge of dealing with your money and assets once you've passed away. Chances are your money will go into probate - basically the process of dividing up your assets, and where they should go. This process can take up to six months, and applies to all estates of more than £5,000.
The executor is then tasked with valuing the estate, and handing out the cash as instructed in the Will. However, there are a number of costs that may affect just how much cash the family members get.
Check out Make a Will without the solicitor’s fees for more on how to cut the cost of writing a Will and Your Will could be useless or dangerous! for what happens to your cash if you die without a valif Will in place.
It goes without saying that as soon as you pop your clogs, your family should be making a claim on your insurance policy, particularly as it may take some time before your loved ones get their hands on that cash.
Typically, that life insurance payout will go into your estate, and can take up to six months to be delivered to your family.
The way around this is to have your policy written in trust, which will ensure that the money goes straight to the named beneficiaries rather than to your estate. Be sure to read Save your family thousands in taxes for more on trusts.
OK, onto some of the bad news. The reason that your executor will have to value your estate is so that it can be worked out whether you are liable to pay Inheritance Tax.
There are very few taxes that rile people as much as Inheritance Tax - I know it always sparks a row in my family - but whatever your views, it pays to plan ahead.
As things stand, if your estate is valued at more than £325,000, you'll pay 40% tax on every penny above that threshold. You can leave your estate to your spouse without paying Inheritance Tax, essentially forming a 'couples' band of £650,000.
So before your loved ones can get the cash that you have left to them, this bill will have to be settled.
The pension pot
What happens to the money you have built up in your pension pot over the course of your life depends entirely on what sort of retirement funding you actually go for.
If you die before the age of 65, and your cash is stored away in a SIPP or personal pension, your fund will be given to your family, completely free of tax. Your family cannot keep the pot as a pension, however, they must take it as a lump sum.
Things can be slightly different with occupational pensions. Exactly what happens next depends on the type of occupational scheme you're in.
If it's salary-related and you're still making contributions, you may enjoy one of the following, depending on your precise scheme:
- a return of all of your contributions, usually repaid without interest
- a tax-free lump sum of up to four times the salary you were getting at the time of your death
- a pension for your spouse, civil partner or another dependant – the amount will be stated in the scheme’s rules
If it's salary-related, but you've stopped making contributions (perhaps because you have left the company) then your dependents don't get such a good deal. An income must be provided to them so long as you are married or in a civil partnership and the scheme is providing benefits instead of the Additional State Pension.
What if you die after you have reached retirement age, and cashed in your pot for a traditional annuity? What happens then? The answer depends on whether your annuity has a guarantee period. Unsurprisingly, this guarantees that the annuity will continue to dish out some cash for a specific period, even if you die halfway through that period. Your family can choose to have that money paid out on a monthly basis, or in a lump sum to your estate.
A further way of protecting your annuity is to go for the catchily titled annuity protection lump sum death benefit. Should you die before the age of 75 a lump sum equivalent to the amount you used to buy an annuity, less any income you've received, will be paid to your estate or beneficiaries.
However, if you have a normal annuity without these features, your money will go to your provider and not your loved ones.
If you instead go for an income drawdown pension after retirement, and die before the age of 75, your dependents will be able to get your cash in a lump sum, though this is taxed at 55%. It really does all come down to which type of pension and annuity you go for, so be sure you research what happens to your money once you die before you sign up.
What happens to my debts?
The UK Insolvency Helpline says that it receives absolutely loads of calls about this subject each year, and it's an understandable issue to be concerned about.
The first thing to be clear about is that the debts do not just disappear after death. Generally the estate will pay off the outstanding debts before the cash is then dished out to the family and friends. The only times that individual family members will be liable for a debt you owed before you died is if the loan or credit was taken out jointly. That's why it's essential to take out life insurance if you have a joint mortgage, for example, as that way you can be sure your partner won't be turfed out of his or her home at the worst possible.
What happens if I am owed money?
Again, this falls to the executor. If there is an agreement in writing that you are owed money, this should be easy enough to enforce, though if the money was lent on a casual, informal basis, then it's unlikely your estate will be able to regain that money.
The situation with business debts, should you own a company is a touch more complicated. It can get a bit tricky legally, so the best thing to do is get advice from an organisation like the Citizens Advice Bureau.
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