Passing On Your Pension
Planning for retirement means more than just saving and investing. It also means thinking about what happens to your pension after you are gone. In the UK, pensions can be passed on to loved ones, but the rules vary by pension type, age at death, and how you set up your wishes. Understanding these rules helps you plan a clear path for your family’s financial security.
Understanding Pension Types and How They Pass On
Defined Contribution Pensions
A defined contribution pension, often called a DC pension, is a pot of money built up over your working life by contributions from you and sometimes your employer. This pension pot is invested in assets such as stocks, bonds, and funds. The final value depends on how well these investments perform.
When you die, any remaining money in a DC pension can usually be passed to your chosen beneficiaries. Here’s how it works:
Before Age 75: Your beneficiaries can inherit the full pension pot tax-free. They can either take a one-off lump sum or leave the money invested and draw it down over time without tax charges.
After Age 75: Your beneficiaries must pay income tax on any amounts they withdraw at their own tax rate. The money can still be paid as a lump sum or taken over time, but income tax applies to each withdrawal.
Annuities: If you used your pension pot to buy an annuity (a guaranteed income for life), inheritance rules depend on your annuity terms. Some annuities end on your death, while others allow a spouse or partner to continue receiving income. Some annuities also offer a guarantee period where an income can be paid to any nominated beneficiary for a specified fixed term.
Key point: To pass on a DC pension smoothly, make sure you have named beneficiaries and that your pension pot is large enough to benefit those you leave behind. Please note that the way pension pots are treated for inheritance tax purposes is currently under review and there are proposed changes that are planned to come into force after 6th April 2027. These proposed changes include that any unspent pension pots will form part of an individuals estate on death and might be subject to inheritance tax.
Defined Benefit Pensions
A defined benefit pension, also known as a final salary pension, promises to pay you a regular income based on your salary and years of service. Because of its structure, inheritance rules are set by the pension scheme and can be less flexible than DC pensions.
Typical inheritance options include:
Spouse’s or Civil Partner’s Pension: Many schemes pay a reduced pension (often around 50% of your pension) to a spouse or civil partner after your death.
Dependent Child’s Pension: Some schemes provide a pension for children until they reach an upper age limit, commonly 23.
Tip: Check your scheme’s rules or scheme booklet to know exactly what your beneficiaries will receive, as rates and rules differ between employers and schemes.
Tax Rules on Passing On Your Pension
Pensions usually benefit from favourable tax treatment in the UK. These tax rules can make pensions more efficient to pass on than other assets.
Death Before Age 75: Pensions can generally be passed on tax-free to beneficiaries, whether taken as a lump sum or through drawdown.
Death After Age 75: Withdrawals must be taxed at the beneficiary’s income tax rate. How much tax depends on their other income in that tax year.
Inheritance Tax (IHT): Pensions usually sit outside your estate for IHT purposes, meaning they are not counted towards the estate value on which IHT is charged. This makes pensions a tax-efficient asset to pass on. However, to keep this tax advantage, you must complete an expression of wish form to direct the pension provider. Please note that the way pension pots are treated for inheritance tax purposes is currently under review and there are proposed changes that are planned to come into force after 6th April 2027. These proposed changes include that any unspent pension pots will form part of an individuals estate on death and might be subject to inheritance tax.
How to Nominate Beneficiaries
Nominating beneficiaries ensures your pension goes to the people you intend:
Get an Expression of Wish Form: Your pension provider supplies this form. It lets you name one or more beneficiaries. You can also specify how the money should be split.
Submit the Form: Return it to your provider and keep a copy.
Review Regularly: Update the form after major life events such as marriage, divorce and births to keep your wishes current.
Note: If you do not submit a form, the pension provider may have to decide who receives the money, which can lead to delays or unintended outcomes.
Reviewing Your Pension for Inheritance
Regular pension reviews help ensure your plan stays on track:
Check Scheme Rules: Understand the inheritance rules for your particular pension scheme.
Monitor Your Pot: Know the current value of your DC pot or the income amount for your DB pension.
Update Beneficiaries: Keep the expression of wish form up to date, especially after job changes or family events.
Tip: Some providers offer an online portal where you can view your pension value, scheme rules, and beneficiary details. Regular checks help you correct any errors quickly.
Comparing Pension Inheritance to Other Assets
Passing on a pension has advantages over other assets:
Tax Efficiency: Pensions usually avoid IHT and carry tax benefits for beneficiaries. However this is currently under review.
Control: An expression of wish form lets you guide the pension provider directly.
Simplicity: Beneficiaries can often access pension funds more quickly than other inheritance assets.
However, pensions may not cover all your wishes:
Estate Planning: Include property, savings, and investments in your wider estate plan to cover all financial needs.
Debt Considerations: Outstanding debts on a pension or other liabilities can affect what passes on.
Summary
Passing on your pension offers a tax-efficient way to support loved ones. The rules depend on whether you have a defined contribution or defined benefit pension and your age at death. By naming beneficiaries with an expression of wish form, reviewing scheme rules regularly, and understanding tax rules, you can provide clear guidance to your pension provider and help your family access the funds you want them to have.
Risk Warnings:
A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
The tax treatment is dependent on individual circumstances and may be subject to change in future. Tax planning advice is not regulated by the Financial Conduct Authority.
Inheritance tax planning is not regulated by the Financial Conduct Authority.
Approved by InPartnership FRN 192638 June 2025