What happens to your pension when you die
Quick answer: Pensions sit outside your normal estate in most circumstances, with their own rules on who inherits and how the money is taxed.
Pensions sit outside your normal estate in most circumstances, with their own rules on who inherits and how the money is taxed. The headline rule is the 'age-75 cliff': die before 75 and most defined contribution death benefits pass tax-free; die at or after 75 and beneficiaries pay Income Tax at their marginal rate. The Government has also announced — subject to legislation expected in 2026 — that from 6 April 2027 most unused pension funds will be brought within Inheritance Tax for the first time.
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Primary source: https://www.gov.uk/tax-on-pension-death-benefits
Defined contribution pensions: the age-75 rule
If you die before age 75 with money left in a defined contribution pension, your nominated beneficiaries can usually take the pot tax-free — as a lump sum, as ongoing drawdown, or as an annuity. The pot must normally be designated to them within two years of the scheme being notified of your death; otherwise the favourable tax treatment can be lost.
If you die at age 75 or older, beneficiaries can still take the pot in any of those forms, but withdrawals are taxed as their own income — at 20%, 40% or 45%, on top of their other earnings. Spreading withdrawals over several tax years can keep more of the money inside lower bands.
The Lump Sum and Death Benefit Allowance
From 6 April 2024 the lifetime allowance was abolished and replaced with two new allowances. For death benefits, the relevant one is the Lump Sum and Death Benefit Allowance, set at £1,073,100. Tax-free lump sums paid on your death (across all your pensions) are tested against this — anything above the limit is taxed at the recipient's marginal rate.
Inherited drawdown and inherited annuities, where the beneficiary takes ongoing income rather than a lump sum, do not consume the LSDBA. Many estate plans use this to pass on more than the cap by funnelling death benefits into beneficiary drawdown rather than lump sums.
The April 2027 Inheritance Tax change
The Autumn 2024 Budget announced that, from 6 April 2027, most unused pension funds and death benefits will form part of the deceased's estate for Inheritance Tax. The proposal is subject to legislation expected in 2026 and ongoing consultation on implementation, and the final rules — including which pension types are in scope and how the tax is collected — may differ from the original announcement.
If the change takes effect in the announced form, pensions left to a spouse or civil partner are expected to remain exempt under the existing spouse exemption. Pensions left to children or other beneficiaries above the £325,000 nil-rate band could face IHT at 40% as well as income tax for post-75 deaths — a potentially heavy combined charge.
We have a separate, regularly updated explainer on this change — see related links.
Defined benefit (final salary) pensions
DB schemes pay a survivor's pension defined by the scheme rules — commonly 50% of your pension for a spouse or civil partner for life, sometimes 67% or two-thirds. Many also pay a children's pension while children are under 18 (or 23 in full-time education).
Survivors of the State Pension are limited and complex. For the new State Pension (people who reached SPa from 6 April 2016) there is generally no widow's or widower's amount unless protected payment rights existed before 2016.
Common questions
- Who decides who inherits my pension?
- The scheme's trustees decide, guided by your expression of wishes (nomination) form. Because the trustees have discretion, the pension does not normally form part of your estate for probate — which is why pensions have historically been outside Inheritance Tax. Keep your nomination up to date, especially after marriage, divorce or bereavement.
- What happens if I haven't filled in an expression of wishes form?
- Trustees will use the scheme's default rules — typically paying to a spouse or civil partner, then financial dependants, then the estate. Without a nomination, you give up the chance to direct money to a partner you are not married to or to specific beneficiaries.
- Can my child inherit my pension as ongoing income?
- Beneficiary (or 'nominee') drawdown is available to any person you nominate, not just spouses or financial dependants. The pension stays inside the tax wrapper and your child draws it as needed, subject to the age-75 income tax rule.
- How does the April 2027 IHT change affect spouses?
- Based on the announced proposal, the spouse exemption would remain: pensions passing to a spouse or civil partner are expected to stay IHT-free. The change would mainly hit estates passing to children or other non-exempt beneficiaries above the available nil-rate bands. Detail is subject to final legislation — see our 'April 2027 pension IHT' guide for the latest position.