This week our reader wants to know what happens to their pension fund if they die.

Reader question:

I have built up a pretty substantial pension fund – it’s currently worth about £400,000 – through both work and additional contributions. I plan to retire in about 10 years’ time.

Can you explain please what happens to my pension if I were to die either before I retire or afterwards?

Carl Lamb of Smith and Pinching responds:

From your question, I am assuming that your pension savings are held in defined contribution schemes – so their value is based on your contributions and any growth in the value of the investments held by the fund – rather than a defined benefit scheme where the value of your benefits are based on your salary and length of service.

You should specify who you want to receive any death benefits by completing an expression of wishes form.

Your financial adviser or the pension company can provide you with the form. It’s important to do it this way not via your will. Although the pension company has the right, in theory, to arrange for any death benefits to be paid to someone of their choosing, they will normally follow your wishes.

If you die before you retire, the value of the pension benefits you have built up would go to your beneficiary.

Once you have started taking benefits, you can leave any unused pension benefits to your chosen beneficiary on your death.

However, the amount of unspent pension you have may depend on the type of pension income arrangement you select.

If you choose to purchase an annuity – an income for life – with all of your fund then you are effectively spending it all, so there will be no unused fund left. Having said that, some annuities may include death benefits such as a spouse’s pension or a payment to a beneficiary if you die within a specified time of taking out the annuity.

If you choose to enter into a flexi-access drawdown arrangement – a contract where your pension fund remains invested and you draw what you need as you need it direct from the fund – then you may well have unspent pension funds to be passed on to your chosen beneficiary.

Your beneficiary may take the inherited pension fund as either a lump sum or an income. The tax treatment of the inherited benefits will depend on your age when you die.

Income tax may be payable on either lump sums or income: this is a complex area with a number of factors to be considered so get independent advice if you want to know more.

Any opinions expressed do not constitute advice. The value of your investment can go down as well as up and you may get back less than the amount invested.

The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.