What happens to your pension if you die young?

Live fast, die young, and leave a bountiful pension.

Final salary

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.

State pensions

If you're single, your state pension dies with you.

If you are married, then what your partner receives depends on their age, and whether there are any children involved. If they are under 45, and you do not have children, then they will only be entitled to a Bereavement Payment - a one-off, tax-free payment of £2,000. However, if you do have children, then they may also qualify for Widowed Parents' Allowance. This is currently worth £97.65 a week.

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If your partner is over 45 and not bringing up children, they may be able to claim a £2,000 refund lump sum, as well as the Bereavement Allowance - a series of taxable weekly payments, for no more than 52 weeks. They are currently worth £97.65 a week.

When they reach state pension age, their basic state pension may be topped up, 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.

Final wish

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.

Unmarried partners

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.  

This is a lovemoney.com classic article, updated for 2011.