What Happens to Your Pension When You Die?

A Guide to Passing on Your Pension

Pensions are often one of the most valuable assets a person owns, yet many people are unsure what happens to their pension when they die.

Understanding how your pension can be passed on is an important part of estate planning. It can help ensure your loved ones are supported and avoid unnecessary complications in the future.

Below we cover what happens to different types of pensions, how death benefits work, and what the upcoming Inheritance Tax changes mean for your planning.

Does Your Pension Form Part of Your Estate?

In many cases, pensions sit outside of your estate.

This means they are not usually covered by your Will and, under current rules, are not typically subject to Inheritance Tax. Instead, pension providers will distribute the funds based on their own rules and any wishes you have expressed.

For this reason, it is essential to ensure your pension provider knows who you would like to benefit.

The Importance of a Nomination Form

Most pension providers allow you to complete an “expression of wishes” or nomination form.

This document lets you indicate who you would like to receive your pension when you die. While it is not legally binding, providers will usually follow your wishes unless there is a good reason not to.

Keeping this form up to date is crucial, particularly after major life events such as marriage, divorce, or the birth of children.

What Happens to Defined Contribution Pensions?

Defined contribution pensions, also known as pension pots, are the most flexible when it comes to passing on benefits.

When you die, the remaining value of your pension can usually be passed to your chosen beneficiaries in one of the following ways:

• A lump sum payment
• Regular income (drawdown)
• A combination of both

Tax Treatment

The tax treatment depends largely on your age at the time of death:

• Before age 75: Benefits are usually paid tax-free to your beneficiaries
• After age 75: Benefits are taxed at the recipient’s marginal rate of income tax

This flexibility has traditionally made pensions one of the most tax-efficient ways to pass on wealth.

What Happens to Defined Benefit Pensions?

Defined benefit pensions, often referred to as final salary schemes, work differently.

These pensions do not usually provide a transferable pot. Instead, they may offer:

• A spouse’s or dependant’s pension
• A lump sum death benefit (in some cases)

The exact benefits will depend on the rules of the specific scheme, so it’s important to check with the provider.

What If You Haven’t Named a Beneficiary?

If no nomination form is in place, the pension provider will decide who should receive the benefits.

They will typically consider close family members or financial dependants, but this can delay the process and may not reflect your personal wishes.

Putting clear instructions in place can help avoid uncertainty and ensure the right people are supported.

Important Changes to Be Aware Of

From April 2027, most unused pension funds and death benefits are expected to be included as part of your estate for Inheritance Tax purposes. This represents a shift from the current position, where pensions are usually treated separately from the rest of your estate.

For many people, pensions have been a highly tax-efficient way of passing on wealth. These changes could reduce that advantage and may mean more estates are subject to Inheritance Tax than before.

The admin after death may also get more involved, with extra reporting and tax to manage.

Because of this, it is increasingly important to review your pension arrangements regularly and consider how they fit within your wider estate planning.

Planning Ahead

Pensions can still play a key role in supporting your loved ones, but planning ahead is essential.

Taking the time to:

• Complete or update your nomination forms
• Understand the type of pension you have
• Consider how it fits alongside your Will and other assets

…can make a significant difference to your family’s financial security.

How We Can Help

Planning what happens to your pension is an important part of protecting your loved ones and ensuring your wishes are carried out.

At Osborne Morris & Morgan, we can help you review your estate planning arrangements, including how your pension fits alongside your Will and other assets, particularly in light of the upcoming changes to Inheritance Tax.

If you would like guidance on estate planning or passing on your pension, we’re here to help.

Call us on 01525 378177 or email info@ommlaw.co.uk to speak to our friendly team.