What Happens to Your Pension When You Die?
What happens to your pension pot depends on the type of pension, your age at death, and who you've nominated as beneficiary. Here's a guide to pension death benefits.
Pension Death Benefits: The Basics
One of the most important — and often overlooked — aspects of pension planning is understanding what happens to your pension when you die. The rules differ significantly between defined contribution (DC) pensions and defined benefit (DB) pensions, and the age at which you die can affect the tax treatment.
Defined Contribution Pensions (Including Drawdown)
A defined contribution pension pot — including funds held in flexi-access drawdown — can typically be passed on to beneficiaries when you die. The tax treatment depends on your age at death:
- If you die before age 75: The pension can be paid to beneficiaries tax-free, either as a lump sum or as a drawdown arrangement. This applies provided the payment is made within two years of the scheme administrator being notified of death.
- If you die at 75 or over: The pension is paid to beneficiaries and taxed as income at their marginal rate when they withdraw it. There is no inheritance tax (IHT) on pension funds at this point (though this will change from April 2027 — see below).
Nomination of Beneficiaries
Pension pots do not automatically form part of your estate — they are held in trust by the pension scheme. To direct who receives the funds, you should complete a nomination of beneficiary (or expression of wishes) form with your pension provider.
The trustees of the pension scheme have discretion over who receives the death benefit, but they typically follow your nomination. Keeping nominations up to date — especially after marriage, divorce, or having children — is important.
Important: Pension IHT Changes From April 2027
Currently (2026/27), pension funds are generally outside your estate for inheritance tax purposes. However, from April 2027, the government has announced that most unused defined contribution pension funds will be brought within the scope of inheritance tax. This is a significant change that may affect retirement and estate planning strategies for many people.
The rules around this change are still being finalised, and professional advice is strongly recommended for those with substantial pension assets.
Defined Benefit Pensions
Death benefits from defined benefit (final salary) pensions vary by scheme rules, but commonly include:
- A lump sum (often 2–4 times pensionable salary) if death occurs before retirement
- A spouse's or dependant's pension (typically 50% of the member's pension) continuing after death in retirement
- Some schemes offer a guaranteed period — the pension continues to be paid for a minimum number of years even if the member dies early in retirement
State Pension
The state pension generally ceases on death. However, a surviving spouse or civil partner may be entitled to inherit some of their deceased partner's Additional State Pension (pre-2016) or, in limited circumstances, receive a bereavement payment.
Speak to a qualified financial adviser for personal guidance on pension death benefits and estate planning, particularly in light of the forthcoming changes from April 2027.