What Happens to Your Pension When You Die?

Many people do not realise that their pension does not simply disappear when they die. In most cases, your pension benefits can be passed to your loved ones. How this works depends on the type of pension, your age at death, and whether you have accessed the pension. Here is what you need to know.

Defined Contribution Pensions: Death Before Age 75

If you die before age 75 with a defined contribution pension (workplace pension, personal pension, or SIPP), your beneficiaries can receive the remaining funds completely tax-free, whether taken as a lump sum or as income. This applies whether or not you have started drawing from the pension.

This makes DC pensions a powerful inheritance planning tool. For many people, it is more tax-efficient to spend other savings first and leave the pension untouched as long as possible.

Defined Contribution Pensions: Death After Age 75

If you die after age 75, your beneficiaries can still inherit the remaining pension pot, but any withdrawals they make are taxed as their income at their marginal rate. They can take the funds as:

• A lump sum (taxed at their marginal income tax rate in the year received)
• Regular income through drawdown (taxed as income)
• An annuity purchased with the inherited pot (taxed as income)

If your beneficiary is a basic rate taxpayer, they would pay 20% tax. If they are a non-taxpayer (for example, a grandchild), they could receive up to £12,570 per year tax-free within their Personal Allowance.

Important: Pensions and IHT from 2027

Currently, DC pensions sit outside your estate for Inheritance Tax. However, the government announced in the Autumn Budget 2024 that from April 2027, unused DC pension funds will be brought into the scope of IHT.

This is a significant change. If your estate (including pensions) exceeds the IHT threshold, your beneficiaries could face a combined tax bill of IHT at 40% plus income tax on withdrawals. The interaction between IHT and income tax on inherited pensions is still being finalised, so it is worth monitoring the position and seeking advice if this could affect you.

Defined Benefit Pensions

DB (final salary or career average) pensions work differently on death:

• Spouse or civil partner pension — most DB schemes pay a pension to your surviving spouse, typically 50% of your pension. Some schemes pay more.
• Lump sum death benefit — if you die before retirement, the scheme usually pays a lump sum (often 2-4 times salary) to your nominated beneficiaries.
• Dependant pensions — some schemes also pay pensions to dependent children until they reach a certain age or finish education.
• Guarantee period — if you die shortly after retiring, some schemes guarantee to pay your full pension for a minimum period (typically 5 or 10 years).

Nomination Forms: The Critical Step

For DC pensions, who receives your pension on death is determined by your expression of wish (nomination form), not your will. The pension scheme trustees have discretion over who receives the benefit, but they usually follow your wishes.

Key actions:

• Complete your nomination form with every pension provider you have — many people never fill one in
• Keep it up to date — review after marriage, divorce, births, or bereavements
• Tell your family where your pensions are held so they know to make a claim

Because pensions are outside the estate (currently), they are paid by the trustees, not the executor of your will. This means they are usually paid faster than other inheritances.