What happens to your pension when you die.
Pensions don't disappear when the holder dies. The rules differ sharply between defined contribution and defined benefit schemes — and the tax treatment depends almost entirely on whether death occurs before or after age 75.
- ▸DC pensions generally sit outside your estate for inheritance tax purposes. Beneficiaries receive the remaining pot as a lump sum or via drawdown.
- ▸If the pension holder dies before 75, beneficiaries pay no tax on the inherited pot. After 75, they pay income tax at their marginal rate.
- ▸DB pensions typically pay a spouse's pension — usually 50% of the member's pension — but rarely offer flexibility beyond that.
- ▸An expression of wishes tells the scheme who to pay the benefits to. It's not legally binding, but trustees almost always follow it.
DC pensions: outside your estate (usually)
Defined contribution pensions — workplace pensions, SIPPs, personal pensions — are held in trust or under a scheme administrator's discretion. That means they don't form part of your estate when you die, which keeps them outside the scope of inheritance tax (IHT) under current rules.
When a DC pension holder dies, the remaining pot passes to the nominated beneficiaries. Those beneficiaries can typically choose to take the money as a lump sum, move it into drawdown, or purchase an annuity. The options available depend on the specific scheme.
The key point: a DC pension doesn't vanish at death. Whatever is left in the pot — whether that's the full amount because the holder never drew on it, or a smaller residual balance — is available for beneficiaries. This is one reason some retirees draw from ISAs and other savings first, preserving the pension pot for inheritance.
The proposed 2027 IHT reform may change this treatment. See the guide to the 2027 pension IHT reform for details.
Before 75 vs after 75: the tax cliff
The tax treatment of inherited DC pensions hinges on one date: the member's 75th birthday.
Death before 75: Beneficiaries receive the pension pot entirely tax-free, whether taken as a lump sum or drawn down over time. There is no income tax, no capital gains tax, and (currently) no IHT.
Death at 75 or older: Beneficiaries pay income tax at their marginal rate on any withdrawals. A basic-rate taxpayer receiving £20,000 per year from an inherited pension would pay 20% tax on those withdrawals. A higher-rate taxpayer would pay 40%.
This creates a significant cliff-edge. A pension holder who dies at 74 leaves a completely tax-free pot. One who dies at 76 leaves a pot that could face 20–45% income tax on every withdrawal. The pension death benefits guide works through the numbers.
Expression of wishes: who decides?
Pensions bypass your will. The scheme trustees or administrator decide who receives the death benefits, using their discretion. In practice, they almost always follow the member's expression of wishes — a form (sometimes called a nomination form) that names the people or entities the member wants to benefit.
An expression of wishes is not legally binding. That's deliberate: it's the reason pensions sit outside the estate. If the member could dictate exactly where the money went via a binding instruction, HMRC could argue the pension forms part of the estate.
The practical consequence: fill in the form, and keep it up to date. Divorce, remarriage, the birth of children — any of these can make an old nomination inappropriate. Most schemes allow updates at any time, and it takes minutes. See the full guide to pension nominations.
DB pensions: spouse's pension and death lump sums
Defined benefit pensions work differently. The pension is a promise to pay an income — not a pot of money — so the death benefits follow a different structure.
Most DB schemes offer:
- A spouse's or civil partner's pension, typically 50% of the member's pension (some schemes pay more). This is payable for the rest of the surviving spouse's life.
- A lump sum death-in-service benefit if the member dies before retirement, often two to four times salary.
- A guarantee period (commonly five or ten years) — if the member dies within this period after retirement, the full pension continues to be paid for the remainder of the guarantee.
DB pensions rarely offer the flexibility to nominate anyone other than a spouse or financial dependant. Children may receive a pension until age 18 or 23, depending on the scheme rules, but the primary benefit is almost always the spouse's pension.
Unlike DC pensions, DB death benefits can't be taken as a lump sum from a pot. The scheme pays what the rules specify. There is no pot to draw down or pass on intact.
- ▸DC pension death benefits are paid at the discretion of scheme trustees or administrators, guided by the member's expression of wishes. [MoneyHelper]
- ▸If the pension holder dies before 75, beneficiaries can receive the entire DC pension pot tax-free. After 75, withdrawals are taxed as income at the beneficiary's marginal rate. [HMRC]
- ▸DB schemes typically pay a spouse's pension of 50% of the member's pension, though some schemes offer higher rates. [The Pensions Regulator]
This is factual information, not financial advice. If you're unsure what's right for your situation, speak to an FCA-regulated financial adviser.