What Happens to Your Pension When You Die?
Pensions are usually discussed in terms of retirement.
How much should you contribute? When can you access the money? How much income will you need later in life?
But there is another important question that many people do not consider until much later:
What happens to your pension when you die?
The answer depends on the type of pension you have, your age when you die, who receives the money and the rules applying to the scheme.
In some cases, pension funds can be passed to beneficiaries relatively tax-efficiently.
In others, tax can apply when the money is withdrawn.
That makes pension planning an important part of wider estate and succession planning.
Not all pensions work in the same way
The first thing to understand is that different pensions can be treated differently.
Common pension types include:
- Workplace pensions
- Personal pensions
- Self-Invested Personal Pensions
- Defined benefit pensions
- State Pension
A defined contribution pension usually leaves behind a fund value.
A defined benefit pension may instead provide survivor benefits under the scheme rules.
The State Pension follows its own separate rules.
This means the answer to “what happens to my pension?” depends heavily on what type of pension you have.
What happens to a defined contribution pension?
A defined contribution pension is built from contributions and investment growth.
When you die, the remaining fund can often be passed to nominated beneficiaries.
Depending on the pension provider and scheme rules, beneficiaries may be able to receive the money as:
- A lump sum
- Pension income
- Drawdown
- Another permitted form of beneficiary payment
The tax treatment can depend significantly on your age when you die.
Why does age 75 matter?
For many defined contribution pensions, the tax treatment of death benefits differs depending on whether death occurs before or after age 75.
Broadly, where death occurs before age 75, certain qualifying pension death benefits may be paid without Income Tax to beneficiaries, subject to the relevant pension rules and limits.
Where death occurs at age 75 or over, beneficiaries may generally pay Income Tax when they withdraw pension funds.
The tax is usually based on the beneficiary’s own Income Tax position rather than automatically being charged at one fixed rate.
This is why beneficiary planning can matter.
A simple example
Suppose someone dies with £200,000 remaining in a defined contribution pension.
If the pension can be passed to a beneficiary and the relevant conditions are satisfied, the beneficiary may have several choices.
They might:
- Leave the money invested
- Withdraw smaller amounts over time
- Take a larger lump sum
If withdrawals are taxable, the timing can affect how much tax is ultimately paid.
For example, taking £200,000 in one tax year may have a very different Income Tax result from drawing it gradually over several years.
Do pensions form part of your estate?
Historically, many pension death benefits have generally sat outside the deceased’s estate for Inheritance Tax purposes where scheme trustees or providers retain appropriate discretion.
However, pension and estate-planning rules can change, and the treatment can depend on the type of pension and arrangement.
For significant pension wealth, estate planning should therefore be reviewed rather than assuming all pension assets will always remain outside the Inheritance Tax calculation.
What is a pension beneficiary nomination?
Pension providers normally allow you to nominate who you would like to receive pension benefits when you die.
You may sometimes see this called:
- Expression of wish
- Beneficiary nomination
- Death-benefit nomination
Potential beneficiaries could include:
- Spouse
- Civil partner
- Children
- Grandchildren
- Other family members
- Other individuals
- Trusts in some circumstances
- Charities
It is important to keep nominations up to date.
Your pension does not necessarily follow your will
This is an important distinction.
Many people assume that if their will says everything should go to their children, their pension automatically follows those instructions.
That may not be how the scheme operates.
Pension death benefits can be handled separately from the estate.
The provider or trustees may consider the beneficiary nomination alongside wider circumstances and scheme rules.
That means your pension nominations and your will should be reviewed together.
When should you update your nomination?
Review your pension beneficiaries after major life events such as:
- Marriage
- Divorce
- Birth of children
- Birth of grandchildren
- Death of a nominated beneficiary
- New relationship
- Significant change in wealth
- Retirement
Someone may complete a pension nomination when they are 25 and never look at it again.
Forty years later, it may no longer reflect what they actually want.
What happens to a workplace pension?
It depends on the scheme.
A defined contribution workplace pension may operate similarly to a personal pension, with a remaining fund potentially available to beneficiaries.
A defined benefit scheme may instead offer benefits such as:
- Spouse’s pension
- Civil partner’s pension
- Dependant’s pension
- Children’s pension
- Death-in-service lump sum
The exact benefits depend on the scheme rules.
Employees should check their pension documentation rather than assuming every workplace scheme provides the same protection.
What is a death-in-service benefit?
Some employers provide death-in-service cover.
This can provide a lump sum to beneficiaries if the employee dies while employed.
It is often linked to salary.
For example, a scheme might provide a multiple of annual salary.
This is not necessarily the same thing as the employee’s pension fund.
Someone could potentially have:
- Pension death benefits
- Death-in-service cover
- Life insurance
all operating separately.
What happens to a defined benefit pension?
Defined benefit pensions promise an income based on factors such as salary and years of service rather than leaving behind a personal investment pot.
When the member dies, the scheme may provide continuing income to eligible beneficiaries.
Depending on the scheme, this could include:
- Spouse
- Civil partner
- Dependant
- Eligible children
The amount is determined by the scheme rules.
If you have a valuable defined benefit pension, check the death-benefit terms before making wider retirement decisions.
What happens to the State Pension?
The State Pension is different from a private pension.
You cannot simply leave your entire State Pension entitlement to your children.
However, in certain circumstances a surviving spouse or civil partner may be able to inherit some entitlement depending on:
- Date of birth
- National Insurance history
- Whether the deceased was under the old or new State Pension system
- Additional State Pension entitlement
The rules can be complex and differ significantly depending on personal circumstances.
What if you have already started drawing your pension?
Taking pension benefits does not necessarily mean nothing remains to pass on.
If you use pension drawdown and money remains invested when you die, there may still be a fund available to beneficiaries.
If you purchased an annuity, the position is different.
The outcome depends on what type of annuity was purchased.
What happens to an annuity when you die?
An annuity provides regular income in exchange for some or all of your pension fund.
Death benefits depend on the product selected.
Options may include:
- Single-life annuity
- Joint-life annuity
- Guarantee period
- Value protection
A basic single-life annuity without additional protection may stop when the individual dies.
A joint-life annuity may continue paying an income to a spouse or other nominated person.
This is why annuity death-benefit options should be considered before purchase.
Should you leave pension money invested?
Some families may decide that leaving pension funds invested is more appropriate than immediately withdrawing everything.
Reasons can include:
- Continued tax-efficient investment
- Avoiding a large Income Tax bill
- Long-term family planning
- Spreading withdrawals across several tax years
However, investment risk remains.
The appropriate decision depends on the beneficiary’s:
- Age
- Tax position
- Financial needs
- Risk tolerance
- Other income
- Wider assets
Pension planning and inheritance planning should work together
Consider someone with:
- £500,000 home
- £300,000 pension
- £100,000 savings
How those assets are passed to family can have very different tax consequences.
The pension should therefore be considered alongside:
- Will
- Property
- Savings
- Investments
- Life insurance
- Gifts
- Inheritance Tax planning
Planning each asset in isolation can create unintended results.
Do not withdraw pension money just to put it into savings
Some people withdraw large amounts from their pension because they want family members to inherit the cash.
That may not always be the most tax-efficient approach.
Once pension money is withdrawn:
- Income Tax may apply to the withdrawal
- Cash may form part of the estate
- Future interest may be taxable
- Investment tax treatment may change
Before making a large withdrawal for estate-planning reasons, consider what happens under both scenarios.
The pension wrapper may sometimes provide advantages that are lost once the money is removed.
Keep pension records organised
You may have accumulated pensions from several employers.
Keep a record showing:
- Pension provider
- Policy number
- Scheme name
- Approximate value
- Contact details
- Beneficiary nomination
- Type of pension
This makes administration significantly easier for your family.
It also helps you understand your overall retirement position.
What if you have lost an old pension?
Changing jobs regularly can result in pension pots being forgotten.
Check old employment records and pension statements.
You may also be able to use official pension-tracing services to identify historic providers.
Finding old pensions can be important for both retirement planning and ensuring beneficiaries know what exists.
Frequently Asked Questions
Can my children inherit my pension?
Potentially, yes. Many defined contribution pensions can be passed to children or other nominated beneficiaries, subject to the scheme rules.
Does my pension automatically go to my spouse?
Not necessarily. The outcome depends on the pension scheme, nominations and applicable rules.
Do beneficiaries pay tax on inherited pension money?
Potentially. The tax treatment can depend on the age of the pension holder at death, the type of pension and how the beneficiary accesses the money.
Is a pension covered by my will?
Not always. Many pension death benefits are dealt with separately from the estate, which is why beneficiary nominations are important.
What happens to an annuity when I die?
It depends on the annuity. Some stop immediately, while joint-life, guarantee-period or value-protected annuities can provide continuing benefits.
Should I update my pension beneficiaries?
Yes. Review nominations after major changes in family or personal circumstances.
Final thoughts
Your pension is not only a retirement asset.
It can also be an important part of what you eventually leave behind.
Review:
- What pensions you hold
- What type they are
- Who is nominated
- What happens on death
- Whether your will and pension nominations still align
- How your wider estate is structured
A small amount of planning now can make administration significantly easier for your family later.
At Merranti Accounting, we help individuals understand how pensions, investments, personal tax and estate planning interact when making long-term financial decisions.
Contact Merranti Accounting if you would like to discuss the tax implications of your wider financial position.
Written by Jenny Seaford ACPA
Senior Accountant, Merranti Accounting
Jenny is a Senior Accountant at Merranti Accounting, supporting individuals and businesses with taxation, accounts and financial reporting. She helps clients understand how significant financial decisions can affect their wider tax position.
