What Happens to Your Pension When You Die

Most people assume their will covers their pension. It almost never does: pensions sit outside your estate and pass under scheme rules, guided by a nomination form most people last touched when they started the job — if ever. For many households the pension is the second-largest asset there is, so these rules deserve ten minutes.

What happens to each type

• Defined contribution pots (workplace and SIPPs): the remaining fund passes to your beneficiaries — as a lump sum, or kept invested as an inherited drawdown pot they can draw on at any age. Unspent drawdown funds pass the same way.
• Defined benefit pensions: the scheme's rules pay what they pay — typically a spouse/dependant pension of around half your entitlement, sometimes children's pensions to set ages. There is no pot to inherit; the value is the promise, and it is not transferable by nomination.
• Annuities: whatever death options were purchased — joint-life continuation, guarantee periods, value protection (annuity options here). Nothing else survives.
• State pension: essentially dies with you, aside from limited inheritance of protected amounts and deferral uplifts for some spouses — check your state pension position rather than assuming.

The age-75 tax line

For defined contribution pensions the key divide is your age at death. Before 75: benefits usually pass income-tax-free (within allowance limits). At or after 75: beneficiaries pay income tax at their own marginal rate on what they draw — inheriting a pot they can time withdrawals from, which still beats most inheritances tax-wise. Planning corollary: after 75, spending pension money last is often optimal; beneficiaries with lower tax rates than yours effectively inherit at a discount.

The big change: inheritance tax is coming to pensions

The long-standing advantage that unspent pensions sat outside inheritance tax is ending: from April 2027, unused pension funds are due to come inside the IHT net under announced reforms. The traditional strategy — "spend the ISA, preserve the pension as a legacy vehicle" — weakens accordingly, and estates built around it should be re-planned as implementation details firm up. Expect this to reshape drawdown-versus-spend decisions across the industry; if your planning leans on the old treatment, this is a genuine sit-down-with-an-adviser moment.

The form that decides everything

Because pensions bypass the will, the nomination (expression of wish) form is the instruction that counts. Trustees usually retain discretion (that is what keeps pensions outside the estate pre-2027), but they follow a current nomination in the overwhelming majority of cases — and an outdated one is how ex-spouses inherit pensions while the current partner litigates. The checklist: complete a nomination for every pot (old employers included — or better, consolidate them), update after every marriage, divorce, birth and bereavement, and tell your beneficiaries which providers hold money, since providers do not always find them. Two minutes per pot, in each provider's app — the cheapest estate planning you will ever do; pair it with the will itself (see our sister site's guides) for the estate that pensions do not cover.

This is general information, not personalised financial advice. Rules and allowances change, and your right decision depends on your own circumstances — for anything that affects your money long-term, it is worth checking the current figures on GOV.UK or speaking to a regulated financial adviser (MoneyHelper offers free, impartial guidance).