What happens to your pension when you die
Nominations and scheme discretion, the age-75 line that decides whether your beneficiaries pay income tax, beneficiary drawdown, what defined benefit schemes pay, and how the April 2027 inheritance tax change rewrites the answer.
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A pension is usually the second-largest thing a person owns and the least understood in death. The rules differ by type of pension, by the age you die, and, from April 2027, by whether the money goes to a spouse. Getting the paperwork right costs nothing and can be worth more than any investment decision you ever make inside the pension.
Who gets it: the nomination
A defined contribution pension does not pass under your will. The scheme trustees or provider decide who receives it, guided by your expression of wish (nomination) form. That discretion is what has kept pensions outside inheritance tax until now, and it is why an out-of-date form (an ex-partner, a parent who has since died) is the single most common and most expensive pension mistake. Update it at every life event: marriage, divorce, each child, a death in the family. You can name several people with percentages, and you can name a trust or a charity.
The age-75 line
Income tax on what your beneficiaries receive turns on whether you die before or after 75. Before 75, funds paid out or designated to beneficiary drawdown within two years are free of income tax, subject to the £1,073,100 lump sum and death benefit allowance for lump sums. From 75, every pound a beneficiary draws is taxed as their income at their own marginal rate, which is why a large pot left to a working child can be taxed at 40% while the same pot spread across several people or drawn slowly over years is taxed at 20% or less. Beneficiaries do not have to take a lump sum: beneficiary drawdown keeps the money inside a pension wrapper, growing tax-free, and lets them draw at the pace that suits their own tax position. Money left in beneficiary drawdown can pass on again to a successor.
Defined benefit and State Pensions
A defined benefit scheme pays what its rules say: typically a spouse’s or partner’s pension of half (sometimes two-thirds) of yours, children’s pensions to a set age, and a lump sum of several times salary if you die in service. There is no pot to inherit, which is exactly why the transfer-out question is usually answered by the survivor benefits alone. The State Pension largely dies with you: under the new State Pension a surviving spouse can inherit only certain protected payments and some pre-2016 additional pension. An annuity pays on only if you bought a joint-life or guarantee-period version: the annuity calculator prices both.
April 2027 changes the estate, not the income tax
From 6 April 2027 unused pension funds and most lump sum death benefits count in your estate for inheritance tax. Everything above still applies; a 40% IHT charge is layered on top for anything not passing to a spouse or civil partner (exempt, as ever) or charity. After 75 the combination is severe: 40% IHT, then income tax on what is left; 64% for a basic-rate-then-higher-rate beneficiary on the figures the 2027 guide works through. Death-in-service lump sums from registered schemes are excluded. Personal representatives report and pay, with the scheme able to settle its share directly. The planning consequences are real but not panicked: spouses first, pension spending brought forward where the plan can afford it, gifting from income, and the inheritance tax calculator run with pensions switched in, which the Hundred Summers Inheritance tab does automatically for deaths from 2027.
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