What Happens to Your Pension When You Die?

Your Pension Doesn't Die With You

Most people spend years building their pension and very little time thinking about what happens to it when they're gone. The answer depends on the type of pension you have, whether you've started drawing from it, and — increasingly — when you die.

The rules are changing significantly from April 2027, and those changes will affect how much of your pension your family actually keeps. Understanding the current system and what's coming is worth a few minutes of your time.

Defined Contribution Pensions (SIPPs, Workplace Pots)

Defined contribution (DC) pensions — including SIPPs, workplace pensions, and personal pensions — are the most common type, and they offer the most flexibility on death.

The current rules (until April 2027)

Right now, DC pensions sit outside your estate for inheritance tax purposes. That makes them one of the most tax-efficient assets to pass on. What your beneficiaries pay depends on your age at death:

Death before age 75:

• Your entire pension pot can be passed to any nominated beneficiary — tax-free.
• They can take it as a lump sum, keep it invested in a drawdown arrangement, or buy an annuity. No income tax. No inheritance tax.

Death at 75 or older:

• Your beneficiaries still inherit the pot, but any withdrawals they make are taxed as income at their marginal rate.
• The pot itself is still outside your estate for IHT — they just pay income tax when they draw from it.

This is why many financial planners suggest spending other assets first (ISAs, GIAs, cash) and leaving your pension untouched as long as possible. Under the current rules, pensions are arguably the single best vehicle for passing on wealth.

What's changing from April 2027

The Autumn Budget 2024 announced that unused defined contribution pension funds will be brought into the estate for inheritance tax purposes from 6 April 2027.

This is a major change. Under the new rules:

• DC pension pots will form part of your taxable estate on death.
• If your total estate (including the pension) exceeds the nil-rate band (currently £325,000, or up to £500,000 with the residence nil-rate band), your beneficiaries could face a 40% IHT charge on the excess — before they even start withdrawing.
• Income tax on withdrawals will still apply for deaths at 75 or older, meaning beneficiaries could face both IHT and income tax on the same pot.

The government has said it will introduce mechanisms to avoid "double taxation," but the details are still being finalised. HMRC published a technical consultation in late 2025, and the implementation framework is expected to be confirmed later in 2026.

What this means in practice

For someone who dies at 80 with a £400,000 pension pot and an estate already using the nil-rate bands:

The exact outcome will depend on final rules and individual circumstances, but the direction of travel is clear: pensions will no longer be the IHT shelter they are today.

Defined Benefit Pensions (Final Salary / Career Average)

Defined benefit (DB) pensions work differently. You don't have a pot — you have a guaranteed income for life. What happens on death depends on your scheme rules:

If you die before retirement

Most DB schemes offer a lump sum death-in-service benefit, typically 2–4 times your salary. This is usually paid to your nominated beneficiary and is often held in a discretionary trust, keeping it outside your estate for IHT.

If you die after retirement

Most schemes pay a spouse's or dependant's pension — typically 50% of your pension, though some schemes pay more. This continues for your spouse's lifetime.

Key points:

• The spouse's pension is taxed as their income — not as a lump sum.
• Unmarried partners may or may not be eligible, depending on the scheme rules. Many older schemes only recognise legal spouses or civil partners.
• If you have no surviving spouse or dependant, the pension usually stops. There's no pot to pass on.
• Some schemes offer a guarantee period (e.g., 5 or 10 years). If you die within that period, the remaining payments are made to your estate or beneficiary.

DB pensions and the 2027 changes

The April 2027 IHT changes primarily target DC pensions. DB scheme death benefits are already largely subject to different tax treatment. However, lump sum death benefits from DB schemes will also be brought within the scope of IHT where they're paid from unused funds. The detail matters here — check your scheme's specific rules.

The State Pension

The State Pension has its own rules:

• It cannot be inherited directly. When you die, your State Pension payments stop.
• Your surviving spouse or civil partner may be able to inherit some of your State Pension entitlement, but only if either of you reached State Pension age before 6 April 2016 (under the old rules) or if there's a protected payment under the new State Pension.
• Under the new State Pension (post-April 2016), there is generally no inheritable element for survivors — unless the deceased had a protected payment above the full new State Pension amount.

In practice, most people retiring now or in future should not assume any State Pension inheritance. It's your own NI record that counts.

Nomination Forms: The Most Important Document Most People Ignore

For DC pensions, your pension provider decides who receives your pot based on your expression of wish (nomination form). This is not the same as your will — pension trustees have discretion, though they almost always follow the nomination.

If your nomination form is out of date — or you never filled one in — your pension could end up somewhere you didn't intend. This is especially important after life changes: marriage, divorce, children, or bereavement.

Check your nomination forms. It takes five minutes and it's one of the most impactful things you can do for your family.

Planning Ahead: What You Can Do Now

Given the 2027 changes, there are several things worth considering:

1. Review your drawdown strategy

If your pension was part of your inheritance plan, the IHT change may alter the optimal order of spending. Drawing from your pension earlier and preserving ISAs (which pass to a spouse tax-free) might make more sense post-2027.

2. Consider your estate as a whole

The IHT impact depends on the size of your total estate. If your estate is below the nil-rate bands even with the pension included, the 2027 changes won't affect you. If you're well above, the pension could now add a significant IHT bill.

3. Use your allowances

Annual pension contributions, ISA allowances, and gift exemptions (£3,000/year, plus the 7-year rule for larger gifts) are all tools for managing your estate size. The earlier you start, the more effective they are.

4. Take advice on DB transfers carefully

The 2027 changes might tempt some people to consider transferring DB pensions to DC arrangements for more control over death benefits. This is a high-stakes decision that requires regulated advice — and the FCA has been clear that a DB transfer is unsuitable for most people. Don't make a transfer decision based on tax changes alone.

Model Your Retirement, Including What You Leave Behind

Understanding how your pension fits into the bigger picture — your income in retirement, your tax position, and what your family receives — requires looking at all the pieces together.

With Scenarios, you can model your pensions, ISAs, and other assets in one projection and see how different drawdown strategies affect both your retirement income and the value of your estate over time. The built-in inheritance tax calculator estimates your IHT liability at every age — factoring in nil-rate bands, the residence nil-rate band, taper relief, and the 7-year rule on gifts — so you can see exactly how your choices today affect what your family keeps.

The Bottom Line

Your pension doesn't vanish when you die — but the rules governing what your family receives are about to change significantly. The current system, where DC pensions sit outside your estate, is being replaced with one where they count towards IHT from April 2027.

That doesn't mean pensions become a bad deal. They're still one of the most tax-efficient ways to save for retirement. But the "leave the pension until last" strategy that many planners have recommended for years needs revisiting.

Check your nomination forms. Understand your scheme rules. And think about how the 2027 changes affect your specific situation — ideally before April 2027, while you still have time to adjust.