Pension Beneficiaries
Learn how pension benefits can be passed on to your loved ones. Understand the options available to beneficiaries and how pension wealth can support future generations.
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Pension Beneficiaries: How Pensions Are Passed On and Your Options
Pensions can provide an income throughout retirement, but they can also play an important role in supporting the people you leave behind. Understanding the rules can help you decide who you would like to benefit from your pension and ensure your nominations continue to reflect your wishes as your circumstances change.
This guide explains how pension death benefits work, how inherited pensions may be taxed and the options that could be available to your beneficiaries.
What Are Pension Beneficiaries?
Pension beneficiaries are people who may receive benefits from your pension when you die. Depending on the pension and its rules, this could be your spouse or civil partner, children, other relatives or someone else you have chosen to nominate.
Most pension providers allow you to name one or more beneficiaries. However, with many pension schemes, your nomination is an expression of your wishes rather than a legally binding instruction. The provider or scheme trustees will usually consider your nomination when deciding who should receive the benefits.
This means pension beneficiary rules can differ from those that apply to assets passed on through your Will. It is therefore important to nominate beneficiaries directly with your pension provider rather than assuming that the instructions in your Will automatically determine who receives your pension.
You should also review your nominations regularly, particularly following significant life events such as marriage, divorce, the birth of a child or the death of someone you previously nominated.
How Pension Death Benefits Work
Pension death benefits are the benefits that may become payable from your pension when you die. Exactly what is available will depend on the type of pension you have, whether you have already started taking benefits and the individual scheme rules.
Depending on the pension, benefits could include:
A lump sum paid to one or more beneficiaries
An income paid to a spouse, civil partner or dependant
Remaining defined contribution savings moved into beneficiary drawdown
An income from an annuity where appropriate death benefits were selected
What happens to a pension after death can therefore vary considerably between different arrangements.
If you have a defined contribution pension with money remaining when you die, there may be a pension pot available to pass on. With a defined benefit pension, there isn’t normally an individual pot to inherit. Instead, the scheme rules determine what benefits may be paid following your death.
Defined Contribution vs Defined Benefit Pensions After Death
The type of pension you have is one of the biggest factors determining what your beneficiaries could receive.
| Defined Contribution Pension | Defined Benefit Pension | |
|---|---|---|
| What may be passed on? | Remaining pension savings | Benefits determined by scheme rules |
| Who may benefit? | Potentially a range of nominated beneficiaries | Often a spouse, civil partner or eligible dependant |
| How might benefits be paid? | Lump sum, drawdown or potentially an annuity | Dependant's pension and/or lump sum, subject to scheme rules |
| Does nomination matter? | Usually, although trustees/provider may retain discretion | Scheme eligibility rules are particularly important |
| What may be passed on? | Who may benefit? | How might benefits be paid? | Does nomination matter? | |
| Defined Contribution Pension | Remaining pension savings | Potentially a range of nominated beneficiaries | Lump sum, drawdown or potentially an annuity | Usually, although trustees/provider may retain discretion |
| Defined Benefit Pension | Benefits determined by scheme rules | Often a spouse, civil partner or eligible dependant | Dependant's pension and/or lump sum, subject to scheme rules | Scheme eligibility rules are particularly important |
With a defined contribution pension, beneficiaries may have greater flexibility over how they receive the remaining funds. In some circumstances, someone who inherits a defined contribution pension through flexi-access drawdown can also nominate a successor to receive anything remaining when they later die.
Defined benefit schemes work differently. They normally provide an income calculated under the scheme rules, often based on factors such as salary and length of service, rather than an individual investment pot. Death benefits therefore depend on the scheme rules and the beneficiary's relationship to the member.
If you are unsure what your own pension provides, check the scheme documentation or contact the provider.
How Inherited Pensions Are Taxed
The tax position when you inherit pension benefits depends on several factors, including the type of pension, how the benefits are paid and the age of the pension holder when they died.
For defined contribution pensions, whether the pension holder dies before or after age 75 can affect the Income Tax treatment of inherited benefits. Other rules and allowances may also apply depending on how the benefits are taken.
Different rules can apply to some defined benefit pensions, older pension arrangements and particular types of death benefit, so beneficiaries should check the position before deciding how to take inherited pension benefits.
Inheritance Tax must also be considered. The treatment of pensions is changing significantly from 6 April 2027, which is covered in more detail below.
How to Nominate or Update Beneficiaries
You can usually tell your pension provider who you would like to receive your pension by completing a beneficiary nomination or expression of wish form.
You may be asked for information such as the beneficiary's name, relationship to you and contact details. Where you nominate several people, you may also be able to indicate the proportion you would like each person to receive.
How many beneficiaries can you have on a pension?
There is no single number that applies to every pension. Some providers allow several people or organisations to be nominated, but the exact options depend on the scheme rules.
Reviewing your nominations periodically rather than treating them as a one-off decision is advisable, particularly following:
Marriage or entering a civil partnership
Divorce or separation
The birth or adoption of a child
The death of a nominated beneficiary
Significant changes to your relationships or financial circumstances
Keeping your nomination current gives your provider or scheme trustees a clearer indication of your wishes when deciding how benefits should be distributed.
What Beneficiaries Can Usually Do with an Inherited Pension
The options available to pension beneficiaries after death depend on the type of pension, the scheme rules and the circumstances of the person who has died.
Defined contribution pensions generally offer the greatest flexibility. Depending on the arrangement, beneficiaries may be able to take the money immediately or leave some or all of it invested.
Lump Sums, Drawdown and Annuity Options
A beneficiary may be offered several ways to receive an inherited defined contribution pension. The options available will depend on the pension arrangement, scheme rules and facilities offered by the provider.
Lump sum: The beneficiary may be able to take some or all of the inherited pension as a cash payment. The tax treatment will depend on factors including the deceased's age at death.
Beneficiary drawdown: Eligible beneficiaries may be able to move inherited pension savings into flexi-access drawdown. Where this option is available, the money remains invested, and withdrawals can be taken over time, subject to the rules of the arrangement.
Annuity: In some circumstances, inherited pension savings can be used to provide an income through an annuity. Existing annuities may also continue to provide benefits where appropriate death-benefit options, such as a joint-life annuity or guarantee period, were selected when the annuity was purchased.
Death Before or After Age 75
The pension holder's age at death affects the Income Tax treatment of inherited defined contribution pensions.
Death before 75: Qualifying benefits can generally be received free of Income Tax. However, conditions apply. For example, lump sum death benefits may be tested against the deceased's remaining Lump Sum and Death Benefit Allowance.
For context, The Lump Sum and Death Benefit Allowance (LSDBA) is a UK tax limit on the total amount of tax-free lump sums you can take from your pension during your lifetime and that can be paid to your beneficiaries after your death
Death at 75 or over: Pension withdrawals received by an individual beneficiary will generally be subject to Income Tax at the beneficiary's marginal rate.
Two-Year Reporting Rules
Timing can affect the tax treatment of some death benefits. Where death occurs before age 75, statutory time limits and other conditions can affect whether particular death benefits are paid free of Income Tax. Beneficiaries and personal representatives should therefore notify and engage with the pension provider promptly and obtain tax advice where necessary.
Beneficiaries and personal representatives should therefore notify and engage with the pension provider promptly and obtain tax advice where necessary.
Upcoming Inheritance Tax Changes from April 2027
The Inheritance Tax treatment of pensions is changing from 6 April 2027. Under current rules, unused pension funds and many discretionary pension death benefits usually sit outside the deceased's estate for Inheritance Tax purposes. For deaths occurring on or after 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of the deceased’s estate for Inheritance Tax purposes. Certain benefits are excluded, including death-in-service benefits payable from registered pension schemes and qualifying dependant’s scheme pensions.
This could affect whether the estate exceeds the available Inheritance Tax thresholds and how much tax is due. Some benefits will remain excluded, including qualifying dependants' scheme pensions, certain joint-life annuities and death-in-service benefits payable from registered pension schemes.
The change applies according to the date of death. If someone dies before 6 April 2027, the current rules apply even if pension benefits are paid after that date.
When to Seek Professional Advice
Passing on a pension can involve decisions about beneficiaries, tax and how your pension fits alongside your other assets.
You may benefit from regulated financial advice if you:
Have several pensions with different death-benefit rules
Want to understand the options available to your beneficiaries
Need to review how your pension fits within your estate planning
Are concerned about the April 2027 Inheritance Tax changes
Have inherited a pension and are deciding how to take the benefits
Want to understand the potential Income Tax implications of different options
Have significant pension savings or a more complex financial position
My Pension Expert can help you understand your pension options and how they fit within your wider retirement plans. An adviser can review your circumstances, explain the potential implications of different choices and help you make informed decisions about your retirement savings.
Frequently Asked Questions
Depending on the pension scheme, you may be able to nominate your spouse or civil partner, children, other family members or someone outside your immediate family. Some schemes may also allow organisations such as charities to be nominated. Eligibility for certain ongoing pension benefits can be more restricted.
Under the rules applying before 6 April 2027, unused pension funds and discretionary death benefits usually fall outside the estate for Inheritance Tax purposes. From 6 April 2027, most unused pension funds and death benefits will be included when calculating the value of an estate for Inheritance Tax.
It can be. The Income Tax treatment depends on factors including the type of pension and the age of the pension holder when they died. Qualifying defined contribution benefits inherited following death before 75 can often be received tax-free, while benefits following death at 75 or over are generally taxable when withdrawn.
Eligible beneficiaries of defined contribution pensions may be able to keep inherited pension savings invested through beneficiary drawdown and take money when required. The options available will depend on the pension arrangement and provider.
Contact your pension provider or check your online pension account. You can usually update an expression of wish or beneficiary nomination form and provide details of who you would like the provider or trustees to consider when distributing your pension benefits.
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This information is for guidance only and does not constitute financial advice. Pension and tax treatment depends on individual circumstances and scheme rules and may change in the future. The value of pensions and investments can fall as well as rise, and you may get back less than you invest.
