What Happens to Your Pension When You Die? UK Rules Explained

Most people spend decades building up their pension, but few know what actually happens to it when they die. Can your family inherit it? Will they pay tax? Does it go through probate? The answers might surprise you — and understanding them can save your family tens of thousands of pounds.

The Short Version

Defined contribution pensions (most modern workplace pensions, SIPPs) can usually be inherited tax-efficiently. Defined benefit pensions (final salary schemes) typically offer limited death benefits. The State Pension stops when you die, with limited inheritance for spouses.

The big date that matters: age 75. Die before 75 and your pension can usually pass to beneficiaries tax-free. Die after 75 and they'll pay income tax on withdrawals.

Let's break this down properly.

Defined Contribution Pensions: The Good News

If you have a modern workplace pension, SIPP, or personal pension where you've built up a pot of money (not a guaranteed income), here's what happens when you die:

You Die Before Age 75

Your entire pension pot can pass to your beneficiaries completely tax-free.

This is extraordinarily generous. Your nominated beneficiaries can:

• Take the whole pot as a tax-free lump sum
• Move it into a beneficiary drawdown account and draw income tax-free
• Leave it invested and draw it down gradually over years — all tax-free

There's no inheritance tax, no income tax, and it doesn't count as part of your estate for probate.

Example: You die at 68 with £250,000 in your SIPP. You've nominated your adult daughter as beneficiary. She can take the full £250,000 tax-free — either as a lump sum or gradually over time. If she takes it gradually and invests it, it can continue growing tax-free in the beneficiary drawdown wrapper.

You Die After Age 75

Your pension pot can still be inherited, but beneficiaries pay income tax on any withdrawals.

The pot itself passes to your beneficiaries, but when they withdraw money from it, it's taxed as income at their marginal rate (20%, 40%, or 45% depending on their total income that year).

Example: You die at 82 with £180,000 in your pension. Your son inherits it into a beneficiary drawdown account. He withdraws £20,000:

• If he earns £30,000/year from work, this £20,000 is taxed at his marginal rate
• £12,570 is covered by personal allowance (if not already used) → tax-free
• £7,430 taxed at 20% → £1,486 tax
• £20,000 - £1,486 = £18,514 net

He can control how much he withdraws each year to manage the tax impact.

The Inheritance Tax Advantage

Here's something many people miss: pensions don't usually count as part of your estate for inheritance tax purposes.

If you have a £500,000 house and £200,000 in savings, your estate is £700,000 — well over the £325,000 inheritance tax threshold (or £500,000 if you're passing the house to children). Your beneficiaries could face a huge tax bill.

But if you have £200,000 in a pension instead of savings, that pension passes directly to your nominated beneficiaries outside your estate. It doesn't count toward the inheritance tax threshold at all (before age 75, entirely tax-free; after 75, income tax only).

This makes pensions one of the most tax-efficient assets to leave to your family — especially if you die before 75.

Drawdown vs Annuity: A Critical Difference

If you've converted your pension pot into an annuity (guaranteed income for life), the pot is gone — you gave it to the insurance company in exchange for the income. When you die, the annuity usually stops, and your family gets nothing.

Exception: if you bought an annuity with a guarantee period (e.g., 10 years guaranteed), the payments continue to your beneficiaries for the remaining guarantee period even if you die early. Or if you chose joint life (couples only), it continues paying your spouse. But you paid for these features with a lower starting income.

This is why drawdown has become so popular: your family can inherit what's left. With an annuity, the insurance company keeps the balance.

Defined Benefit Pensions (Final Salary Schemes)

If you have a defined benefit pension (common in public sector — NHS, teachers, civil service — or older private sector schemes), death benefits work differently.

While You're Still Working

If you die before retirement, most DB schemes pay:

• Lump sum — typically 2-4 times your salary
• Dependant's pension — usually 50% of what your pension would have been, paid to your spouse/civil partner for life

These are usually tax-free if you die before 75.

After You Retire

Once you've started drawing your DB pension, if you die:

• Your pension stops (it was based on your life)
• Spouse/civil partner pension — typically 50-66% of your pension, paid for their life
• Dependent children's pension — sometimes paid until age 18-23 if in education

There's usually no lump sum and no pot to inherit — DB pensions are about income, not capital.

The Nomination vs Dependants Issue

Most DB schemes pay dependant's pensions to spouses and civil partners automatically. If you want it to go to someone else (adult child, partner you're not married to), check your scheme rules. Some schemes have "discretionary dependants" — the trustees decide. Others only pay legal spouses.

Action: Check your scheme booklet or member portal. Make sure your expression of wish/nomination form is up to date.

The State Pension

The State Pension is for your life only. When you die, it stops. But there are limited inheritance provisions for spouses:

If Your Spouse Has Not Yet Reached State Pension Age

They can't inherit your State Pension — it just stops. They'll need to rely on their own National Insurance record when they reach State Pension age.

If Your Spouse Has Reached State Pension Age (Before April 2016 Rules)

Under the old rules (pre-April 2016), a spouse could sometimes inherit a portion of your Additional State Pension (SERPS/S2P). This is complex and depends on your ages and NI records.

New State Pension (Post-April 2016)

If you reached State Pension age after 6 April 2016, there is no inheritance of your State Pension. It stops when you die. Your spouse builds their own State Pension entitlement.

Bottom line: Don't plan on passing State Pension to anyone. It's for you alone.

Who Gets Your Pension? Nominations and Discretion

This is where many people get caught out.

Pensions Don't Follow Your Will

Your will has no control over your pension. Pensions sit outside your estate. Instead, you nominate beneficiaries via an Expression of Wish form (sometimes called a death benefit nomination).

It's Usually Discretionary

Most pensions give trustees or the provider discretion to decide who gets the money, taking your nomination into account but not bound by it.

Why? To keep pensions outside your estate for inheritance tax. If you could control it absolutely (like your house or savings), it would count as part of your estate.

What this means: Your nomination is very important and usually followed, but it's not legally binding like a will.

Keep Your Nomination Up to Date

Major life events = update your nomination:

• Marriage or divorce
• New partner (especially if not married — they have no automatic rights)
• Children born
• Death of a previously nominated beneficiary
• Relationship breakdown

Action: Log into each pension provider (workplace pensions, SIPPs, old pensions) and check/update your nomination. Do this every few years or after any major life change.

Special Situations

Unmarried Partners

If you're not married or in a civil partnership, your partner has no automatic entitlement to your pension. They can only inherit if:

• You've nominated them on your Expression of Wish
• The scheme allows discretionary dependants and they qualify (usually means financially dependent)

Cohabiting for 20 years is not enough if you haven't nominated them and the scheme doesn't recognise them. Marriage and civil partnership have legal protections; cohabitation does not.

Children

You can nominate children as beneficiaries. If they're under 18, the money would typically go into trust until they're older (exact rules vary by provider).

Adult children can inherit pension pots directly. Be aware of the income tax implications if you die after 75 — a large inheritance into drawdown could push them into higher tax bands when they withdraw.

Ex-Spouses

Divorce doesn't automatically remove an ex-spouse from your pension nominations. If you nominated them 20 years ago and never updated it, they could still be entitled.

Action after divorce: Update all pension nominations immediately.

No Nomination on File

If you die without a valid nomination, the pension provider or trustees decide based on:

• Scheme rules
• Financial dependants
• Your personal circumstances

They'll usually prioritise spouse/civil partner, then children, then other dependants. But this can cause delays and disputes. Just fill in the form.

Tax Traps to Avoid

The Beneficiary Income Tax Trap

If you die after 75, your beneficiaries pay income tax on pension withdrawals. If they take a large lump sum in one go, it could push them into higher rate (40%) or additional rate (45%) tax.

Smarter: Encourage beneficiaries to use drawdown and withdraw gradually over several years, keeping within basic rate tax bands.

Example: £200,000 inherited pension.

• Take it all in year 1: could face 40-45% tax on much of it = £60,000-£80,000 tax bill
• Take £20,000/year over 10 years: likely stay in basic rate = £20,000-£30,000 total tax

The pot continues growing during those 10 years too, potentially outweighing the tax paid.

The Lump Sum Death Benefit Tax (Over £1.073m)

There used to be a "lifetime allowance" for pensions (£1.073m). That's been abolished for most purposes, but it still applies to lump sum death benefits:

If you die before 75 with more than £1.073m in pensions, the excess is taxed at 55% if taken as a lump sum.

Workaround: Beneficiaries take it as drawdown (income) instead of a lump sum. Income has no cap and is tax-free if you died before 75.

This mainly affects high earners with very large pots.

The Two-Year Window

When you die, beneficiaries have two years to decide what to do with inherited pensions. If they do nothing, the provider may make the decision for them (often paying it out as a taxable lump sum).

Action for beneficiaries: Don't delay. Decide within months whether to take a lump sum or move into beneficiary drawdown.

What Your Family Should Know

When you die, your family will need to:

1. Notify your pension providers — each workplace pension, SIPP, personal pension 2. Provide a death certificate (original or certified copy) 3. Complete claim forms — the provider will send these 4. Decide lump sum vs drawdown — get advice if the sums are large 5. Consider tax — especially if you died after 75

Make it easier for them:

• Keep a list of all your pensions (provider names, policy numbers, rough values)
• Store this with your will or tell your executor where to find it
• Update your nominations and tell your family they exist

Practical Steps You Can Take Now

1. Make a pension inventory List every pension you have:

• Provider name
• Policy/account number
• Approximate value
• Login details (in a secure location)

2. Update your nominations Log into every pension and check:

• Is there a nomination on file?
• Is it current?
• Does it reflect your wishes?

3. Consider your age-75 strategy If you're in drawdown and approaching 75, consider:

• Taking larger withdrawals before 75 (they're taxable to you but reduce what beneficiaries would pay tax on later)
• Or leaving it untouched if you don't need the money and want to pass it tax-free

4. Talk to your family They need to know:

• You have pensions
• Where the information is kept
• Who you've nominated
• Whether you want them to take it as a lump sum or income

5. Think about marriage If you have a long-term partner but aren't married, consider:

• Whether marriage/civil partnership makes sense for pension inheritance
• Or at minimum, ensure they're nominated and check if the scheme recognises discretionary dependants

Final Thoughts

Pensions are some of the most tax-efficient assets you can leave to your family — especially if you die before 75. But the rules are complex, nominations are often out of date, and families frequently don't know what pensions exist.

Taking an hour to check your nominations, make a pension list, and talk to your family could save them tens of thousands in tax and months of stress at an already difficult time.

Want to see how your pension fits into your overall retirement and estate plan? Model your retirement income and see how your pot could last for you — and what might be left for your family.