What Happens To Your Pension When You Die?

In many cases pension savings do not automatically form part of a person's estate.

Instead, pensions can often be paid directly to nominated beneficiaries.

The rules for pension death benefits depend on the type of pension scheme.

Because pension rules vary, many people review their pension arrangements as part of broader estate planning.

Our article on pension drawdown explained covers how drawdown pensions can interact with beneficiary rules in more detail.

Pension death benefits are typically paid to beneficiaries following the death of the pension holder.

The way benefits are paid depends on the pension type, the pension scheme rules, and whether the pension holder had nominated beneficiaries.

In defined contribution pensions, the remaining pension fund is typically available to pass on after death.

In defined benefit pensions, a spouse's pension or dependant's pension may be paid instead, rather than a lump sum.

Because the rules differ significantly between pension types, people often review their pension arrangements to understand what death benefits apply to their specific scheme.

Most pension providers allow individuals to nominate beneficiaries.

These nominations indicate who should receive pension benefits after death.

Beneficiaries may include:

• A spouse or partner
• Children
• Other family members
• Other nominated individuals

Although nominations are not always legally binding, pension providers usually consider them when deciding how benefits should be distributed.

Keeping beneficiary nominations up to date is an important part of pension administration — particularly following major life events such as marriage, divorce or the birth of children.

Tax treatment of pension death benefits can depend on the age of the individual at death.

MoneyHelper provides further guidance on how pension death benefits may be taxed: moneyhelper.org.uk

Possible Future Changes To Pension Tax Rules

Pension tax rules can change over time as governments review the tax system.

There has been ongoing discussion among policymakers and economists about whether pension savings should be included within estates for inheritance tax purposes in the future.

For example, research published by the Institute for Fiscal Studies (IFS) has examined how pensions are currently treated differently from other assets when calculating inheritance tax.

The IFS notes that pensions can often sit outside an estate for inheritance tax purposes under current rules, which may influence how individuals structure their retirement savings and estate planning.

Further information on this analysis can be found here: ifs.org.uk

While no specific changes have been implemented at the time of writing, individuals often review pension arrangements periodically to understand how future policy changes could affect estate planning.

Pensions can sometimes provide tax advantages compared with other assets when planning inheritance.

Because pension savings may sit outside the estate for inheritance tax purposes, they can play an important role in wealth transfer planning.

For this reason, pensions are often considered alongside other financial assets when reviewing long-term estate planning arrangements.

Our article on how to take pension income in retirement provides further context on the decisions people face when accessing pension savings — decisions that can also affect what is available to pass on.

Those with multiple pensions may also find it helpful to review how their pension arrangements are structured. Our article on multiple pension pots explained outlines the key considerations involved.