What Happens To Your Pension If You Die Young?
Live fast, die young, and leave a bountiful pension.
One excuse people sometimes offer for refusing to start a pension is: "What's the point, I might fall under a bus tomorrow".
It's flimsy reasoning, but it does raise one interesting question. What happens if you take out a pension and actually do fall under a bus? Who does your pension pot go to then?
Everybody starts pension schemes on the assumption they will be around to spend the money in retirement. And thanks to rising life expectancy, most of us will, but not everybody.
Two of the Beatles didn't make it: John Lennon (40) and George Harrison (57). Elvis didn't (42). Nor did Superman Christopher Reeve (52). Heath Ledger (28) didn't even come close. Dying young doesn't just happen to celebrities, anybody can do it.
With the retirement age rising to 68 by 2046, more of us could die before our pension pays out, and we should all plan ahead, just in case.
What happens partly depends on what type of scheme - or schemes - you have.
Final salary pensions, sometimes called defined benefit schemes, are the Rolls-Royce of company pension schemes. Sadly, these schemes are not as prevalent 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.
Schemes do vary. Some companies pay a pension to unmarried partners and same-sex partners, or even other relatives. Others may not, so check the rules carefully.
Money-purchase workplace pensions
Most employees are now in money-purchase, or defined contribution, pension schemes, and will use their pot to buy an annuity. But what if you don't make it that far?
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.
If you have money-purchase benefits with a previous employer you should also get a full return of your fund.
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.
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.
When they reach state pension age, their basic state pension may be topped up to a maximum £90.70 a week, which is the full state pension for a single person, depending on your contributions. They may also claim 50% of any second state pension (S2P) entitlements you had.
But 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 do, regardless of the type of pension you have.
When you take out a scheme, you should make an expression of wish, setting out your beneficiaries.
You should also regularly check your nomination is up to date, particularly if you have divorced or remarried, to make sure the money goes to the right person.
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 could take months.
And you should also write a will (and keep it updated), to make sure your wishes are clear and legally enforceable.
Sorting out your pensions and other assets are particularly important for unmarried partners, who have no legal protection when it comes to divvying up the goods.
This is particularly bad news for women, many of whom wrongly assume they are entitled to their partner's assets as a `common-law wife' -- there's no such thing -- or because they have lived with their partner for a certain number of years.
The truth is that even if you have children together, your legal entitlement is zero. If you want to be sure your pension and other assets will go to an unmarried partner you must either nominate them or set this out in your will. And again, don't forget to update those nominations.
Don't miss the bus
The falling under a bus argument fails even if you do die young, because your pension will survive you, and help secure the future of the people you love most. It's nice to leave a little something behind.