What happens to your pension when you die?

In this guide, we’ll walk through what happens to your pension when you die, how different types of pensions are treated, and what’s changing from April 2027. We’ll also explain how to make sure your wishes are respected, and your beneficiaries are supported.

Yes. In most cases, your pension doesn’t disappear when you die, it can be passed on to your chosen beneficiaries. This includes your spouse, children, or anyone else you nominate.

But how it’s passed on, and how it’s taxed, depends on several factors:

• The type of pension you have.
• Your age at the time of death.
• Whether you’ve accessed the pension yet.
• Upcoming changes to inheritance tax rules.

Let’s break it down.

These are the most common type of personal and workplace pensions. You build up a pot of money over time, which is invested and can potentially be accessed flexibly.

If you die before age 75:

• Your beneficiaries can usually inherit your pension tax-free (usually capped at the lump sum and death benefit allowance of £1,073,000).
• Depending on your pension scheme, your beneficiaries may be able to take the inherited pension as a lump sum, regular income, or leave it invested (though older schemes may restrict these options).

If you die after age 75:

• Your beneficiaries will pay income tax at their marginal rate when they withdraw the money.

From April 2027:

• Unused DC pensions will be included in your estate for inheritance tax (IHT) purposes.
• This means your pension could be taxed twice. Once under IHT, and again as income when your beneficiaries draw it.

Also known as final salary pensions, these provide a guaranteed income based on your salary and years of service.

What happens when you die:

• Some DB schemes offer a dependant’s pension, typically a percentage of your income (e.g. 50%) paid to a spouse or partner.
• Others may not offer any income after death, depending on scheme rules; if you have one of these types of pension it is important to check the rules with the administrator of the pension.

Tax treatment:

• The income received by your dependants is taxed at their marginal rate.
• DB pensions are generally excluded from the new IHT rules if they pay a dependant’s pension or are part of a non-discretionary scheme.

The UK State Pension doesn’t pass on in the same way. However:

• A surviving spouse may be eligible for bereavement benefits or inherit part of the deceased’s State Pension, depending on their age and National Insurance record.

From 6 April 2027, unused funds in most Defined Contribution (DC) pensions will be included in your estate for inheritance tax (IHT) purposes. This change does not apply to Defined Benefit (DB) pensions that pay a dependant’s pension or are part of a non-discretionary scheme. It’s important to check your pension type and scheme rules, as older or less common arrangements may be treated differently. The term “discretionary scheme” typically refers to pension arrangements where the provider has discretion over how benefits are distributed, which can affect how IHT is applied.

Key points:

• Personal representatives (e.g. executors) will be responsible for reporting and paying IHT on pensions included in the estate.
• The standard IHT rate is 40% on the portion of your estate – including the pension pot - above the thresholds (currently £325,000 for individuals plus £175,000 for an individual’s residential home, so up to £1,000,000 for married couples).
• If your beneficiaries withdraw funds from a pension after you die, the tax treatment depends on your age at death:
  • If you die before age 75, withdrawals are usually tax-free (within the lump sum and death benefit allowance).
  • If you die after age 75, beneficiaries will pay income tax at their marginal rate.
• This means that from 2027, some pensions—particularly unused Defined Contribution pots—could be taxed twice: once under IHT and again as income when accessed by beneficiaries.

This change is designed to close loopholes where pensions were used primarily as tax-free inheritance vehicles rather than retirement savings.

Here are some practical steps you can take:

1. Nominate your beneficiaries

Make sure your pension provider has up-to-date details of who you want to inherit your pension. This is known as an “expression of wish” and helps ensure your money goes where you intend. Contact your pension administrator to check and update your nomination. 

2. Review your will

Your pension usually sits outside your will, but having a clear, well-considered will helps align your overall estate planning. Review your will to ensure that it reflects your wishes. 

3. Understand your scheme rules

Check whether your pension scheme offers a dependant’s pension, lump sum death benefits, or other options. A financial adviser can help you navigate this, or you can contact your pension administrator.

4. Plan for tax

From 2027, IHT could apply to your pension. Consider how this affects your estate and whether you need to adjust your plans.

5. Talk to your adviser

At Schroders Personal Wealth, we’re here to help you make informed decisions and provide tailored personal advice. Whether you’re updating your beneficiaries or reviewing your retirement plan, we’ll guide you every step of the way.

Your pension doesn’t just support you in retirement, it can also support your loved ones after you’re gone. But with new inheritance tax rules on the horizon, it’s more important than ever to understand how your pension is treated when you die.

By staying informed, nominating beneficiaries, and seeking advice, you can make sure your pension continues to provide value, long after you’ve stopped using it.

Let’s talk about what matters to you. Whether you’re planning for retirement or thinking about your legacy, we’re here to help you feel confident about your financial future.

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Pensions are a long-term investment. The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits, which isn’t guaranteed, and can go down as well as up. The benefits of your plan could fall below the amount(s) paid in.

Always seek a professional opinion as tax rules can be complex, depend on individual circumstances and are subject to change.

This article is for information only and is not a personal recommendation. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.