What Happens to Your Pension When You Die? Death Benefits Explained

Your pension can be one of the most valuable things you pass on, yet the rules around what happens to it when you die are widely misunderstood. Getting them right can make a real difference to the people you leave behind. This article explains what happens to your pension when you die, how death benefits are taxed, and the changes coming that everyone should be aware of.

Pensions have long been an efficient way to pass wealth to the next generation, though that is changing. Understanding the current rules, and what is coming, helps you plan so your pension goes to the right people in the most efficient way.

What Happens to a Defined Contribution Pension When You Die

The money left in most defined contribution pensions can be handed on after you die, going to the beneficiaries you have named rather than simply disappearing. Whatever remains in your pot can pass to the people you choose.

Your beneficiaries can generally choose how to take what they inherit, whether as a lump sum or as an income, depending on the scheme. This flexibility is one reason pensions have been such a valuable way to pass on wealth. What they receive, and how it is taxed, depends chiefly on your age when you die.

How Death Benefits Are Taxed: The Age 75 Rule

The tax on pension death benefits depends largely on your age when you die, with age 75 as the key dividing line. This single factor shapes what your beneficiaries pay.

If you die before 75, your beneficiaries can usually receive the pension free of income tax, provided it is within the available allowance and paid within the relevant time limit. If you die at 75 or over, whatever your beneficiaries take is taxed at their own marginal rate of income tax. This makes your age at death a significant factor in how much of your pension reaches your family, and it is worth understanding when planning.

Defined Benefit Pensions and Death

Defined benefit pensions work differently. Rather than passing on a pot, they typically provide an ongoing pension to a surviving spouse, civil partner or dependant, a genuinely valuable safety net for your family.

How much is paid varies from scheme to scheme, though a survivor’s pension of roughly half the member’s is common, and some schemes add a lump sum where death occurs early. It is worth checking your own scheme’s rules so you know exactly what your family would receive. Because the rules differ between schemes, it is worth checking what your own defined benefit pension provides for your family, and making sure your details are up to date.

The Inheritance Tax Change From April 2027

A significant change is on the way. From 6 April 2027, unused pension money is due to fall inside your estate for inheritance tax, reversing the long-standing position where pensions sat outside it.

As now, anything left to a spouse or civil partner, or to charity, is expected to stay free of inheritance tax. But for others inheriting a pension, this change could mean inheritance tax applies on top of any income tax, depending on the circumstances. If passing on your pension is part of your plans, it is worth understanding how these changes affect you and reviewing your approach. Tax treatment depends on individual circumstances and may be subject to change.

Making Sure Your Pension Goes to the Right People

Who receives your pension when you die depends largely on who you have nominated with your pension scheme, so keeping that nomination up to date is essential. Your pension does not usually pass under your will, which surprises many people.

Because the pension scheme decides who benefits, based on your nomination and its own rules, an out-of-date nomination can send your pension to the wrong person. A quick review whenever your life changes, a marriage, a divorce, a new grandchild, takes only minutes. It is one of the simplest and most important steps in making sure your pension benefits the people you intend.

Frequently Asked Questions About Pension Death Benefits

What happens to my pension when I die?

Most defined contribution pensions can be passed on to your nominated beneficiaries, who can usually take the money as a lump sum or an income. Defined benefit pensions typically pay a reduced pension to a surviving spouse or partner. What your beneficiaries receive, and how it is taxed, depends chiefly on your age when you die and on your nomination.

Is an inherited pension taxed?

It depends on your age at death. If you die before 75, beneficiaries can usually receive a defined contribution pension free of income tax, within limits. If you die at 75 or over, they pay income tax at their own marginal rate on what they take. Separately, from 6 April 2027, most unused pensions are due to count towards your estate for inheritance tax.

Does my pension pass under my will?

Usually not. A pension normally passes according to the nomination you make with your scheme, not under your will, because the scheme decides who benefits based on its rules and your wishes. This is why keeping your nomination up to date is so important, as an old one can send your pension to the wrong person.

Ready to Plan What You Leave Behind?

Your pension can be a valuable legacy, but only if it passes to the right people in the most efficient way. Getting that right is worth a proper conversation.

TL;DR: What Happens to Your Pension When You Die? Death Benefits Explained

The money in most defined contribution pensions can be handed on, and the tax your family pays hinges chiefly on your age when you die, with big inheritance tax changes arriving in 2027.

• Defined contribution pensions can usually be passed to your nominated beneficiaries.
• Die before 75 and the money can usually pass free of income tax, within limits.
• Die at 75 or over and beneficiaries pay income tax at their own rate.
• Defined benefit schemes usually pay a reduced pension to a surviving spouse or partner.
• From 6 April 2027, most unused pensions are due to count towards your estate for inheritance tax.
• Keep your nomination up to date, as a pension does not usually pass under your will.