What Happens to Your Pension When You Die? The UK Rules Most People Don't Know
- Alpesh Patel
- 3 days ago
- 7 min read
Updated: 2 days ago
What Happens to Your Pension When You Die?
Your pension does not automatically pass to your spouse, your children, or anyone else. It passes to whoever you have nominated and if you have not nominated anyone, it sits in a discretionary pot that your pension provider’s trustees decide how to allocate.
This surprises a significant proportion of people in GIP portfolio reviews when the topic comes up. The assumption is that a pension works like a bank account or an investment portfolio — that it falls into the estate and is distributed according to the will. It does not.
Defined contribution pensions, including SIPPs, sit outside the estate for inheritance purposes. They are governed by trust law and your pension provider’s discretionary powers, not by probate.
Understanding the death benefit rules for your SIPP or DC pension is not a morbid exercise. It is a practical planning task that can make a very significant difference to how much your beneficiaries receive — and there are changes coming from April 2027 that every pension holder should be aware of now.
Alpesh Patel OBE is a hedge fund manager, Bloomberg TV alumnus, Financial Times author, and former Visiting Fellow at Corpus Christi College, Oxford. This topic arises in GIP portfolio reviews with increasing frequency as members’ portfolios grow and their planning horizons extend.
The Critical Rule: Die Before 75 vs After 75
The single most important distinction in UK pension death benefit rules is whether the pension holder dies before or after their 75th birthday.
Dying Before Age 75
If you die before your 75th birthday, your nominated beneficiaries can receive your unused defined contribution pension including any SIPP entirely free of income tax. They can take it as a lump sum or move it into their own drawdown arrangement, and in either case, no income tax is payable on receipt.
This is one of the most powerful estate planning features of the defined contribution pension and SIPP. A £1 million SIPP pot, passed to a beneficiary before the holder’s 75th birthday, can be received tax-free.
This is why many people with significant pension wealth deliberately leave the SIPP undrawn for as long as possible and draw income from ISAs and other taxable assets first — to preserve the pension’s tax-free death benefit status.
Dying After Age 75
If you die after your 75th birthday, your beneficiaries can still inherit your pension — but they will pay income tax on any amount they withdraw, at their own marginal rate. A beneficiary who is a basic rate taxpayer will pay 20%. A higher rate taxpayer will pay 40%. The pension itself does not disappear — it passes to the beneficiary as a ‘beneficiary drawdown’ arrangement — but withdrawals are taxed.
Expression of Wishes: The Most Important Form You Are Not Filling In
Because DC pensions sit outside the estate, your will has no legal force over them. The mechanism for directing your pension to the right people is the ‘expression of wishes’ or ‘nomination of beneficiaries’ form — a document held by your pension provider that tells the trustees who you want to receive your pension when you die.
The trustees are not legally bound by your expression of wishes — it is discretionary — but in practice, they almost always follow it. The danger of not completing it is that the trustees must use their own discretion entirely, which may result in the pension being paid to your estate (and therefore subject to probate and potentially IHT) or distributed in a way that does not reflect your intentions.
Every SIPP and workplace DC pension holder should complete an expression of wishes form today — and review it every time a major life event occurs: marriage, divorce, birth of children or grandchildren, death of a nominated beneficiary. Many people complete the form once when they open the pension and never update it again.
The 2024 Budget Change: Pensions and IHT from April 2027
The most significant change in pension death benefit rules in a generation was announced in the October 2024 Autumn Budget: from April 2027, unused pension pots will be included in the estate for inheritance tax purposes.
Under current rules (until April 2027), defined contribution pensions sit completely outside the estate for IHT. A person with £500,000 in a SIPP and £500,000 in other assets passes only £500,000 of their estate for IHT purposes — the SIPP is invisible to HMRC on death. From April 2027, the SIPP will be included in the estate. This fundamentally changes the IHT planning implications of holding large pension balances undrawn.
The practical implications are significant. Individuals who previously held their SIPP undrawn as an IHT-efficient wealth transfer vehicle will need to revisit that strategy. The optimal withdrawal sequencing — which assets to draw first, when, and in what amounts — becomes considerably more complex from April 2027. This is a topic that warrants proper specialist planning, not just a single GIP blog post.
Lump Sum vs Beneficiary Drawdown: Which Is Better for Your Heirs?
When a beneficiary inherits a DC pension, they typically have a choice between taking it as a lump sum or moving it into beneficiary drawdown. The difference is significant:
Lump sum: The entire pot is paid at once. If death is before 75, this is tax-free. If after 75, the full amount is taxed at the beneficiary’s income tax rate in the year of receipt — potentially pushing a basic rate taxpayer into higher rate territory on a large payment.
Beneficiary drawdown: The pot stays invested and the beneficiary draws from it over time. This allows tax to be spread across multiple years and potentially managed to stay within lower tax bands. The pot continues to benefit from investment growth while undrawn. This is almost always the more tax-efficient option for larger inherited pension pots.
Three Things Every SIPP Holder Must Do Today
Complete or update your expression of wishes on every pension you hold. Log into your SIPP platform and your employer scheme and check who is currently nominated. If your life circumstances have changed, update it today. This takes 10 minutes and may save your beneficiaries hundreds of thousands of pounds.
Review your withdrawal strategy in light of the April 2027 IHT changes. If you have been deliberately leaving your SIPP undrawn as an IHT-efficient transfer vehicle, the calculation changes materially from April 2027. Consider whether drawing from the SIPP earlier, or in larger amounts before April 2027, is advantageous for your specific estate.
Ensure your beneficiaries know the pension exists. Many inherited pensions go unclaimed because beneficiaries did not know the pension existed. Keep a record of all your pension providers, policy numbers, and platform login details in a secure location that your executors can access.
Frequently Asked Questions: Pension Death Benefits
Does my pension go to my spouse automatically when I die?
Not automatically. Your DC pension sits outside your estate and does not follow your will. It is distributed at the discretion of the pension trustees, guided by your expression of wishes. If you have nominated your spouse in your expression of wishes, the trustees will almost certainly pay it to them. If you have not completed the form, there is no guarantee. Complete your expression of wishes today.
Is there inheritance tax on a pension?
Under current rules (until April 2027): no. DC pensions sit outside the estate for IHT purposes. From April 2027: yes. The October 2024 Autumn Budget confirmed that unused DC pension pots will be included in the estate for IHT from April 2027, at the standard 40% rate above the nil-rate band. This is one of the most significant pension tax changes in recent history and warrants careful planning before the changes take effect.
What is a death lump sum charge?
If a DC pension is paid as a lump sum after the holder dies at age 75 or over, the lump sum is subject to income tax at the recipient’s marginal rate. On a large pension pot, this can mean a significant proportion is taken in tax if received in a single year. Beneficiary drawdown — spreading withdrawals across multiple tax years — typically produces a substantially better net outcome.
Can I leave my SIPP to a non-family member?
Yes. You can nominate anyone as a beneficiary in your expression of wishes — a friend, a charity, an adult child, a partner, or any other individual. The pension trustees will consider your nomination carefully and, in almost all cases, will follow it. From April 2027, the IHT treatment may vary depending on the relationship between the deceased and the beneficiary, so this is an area where specialist estate planning guidance will be increasingly valuable.
What happens to a pension in drawdown when the holder dies?
Any funds remaining in a drawdown SIPP when the holder dies follow the same death benefit rules as an undrawn pension: tax-free to nominated beneficiaries if death is before 75, taxed at the beneficiary’s income tax rate if death is after 75. The fact that the pension is in drawdown does not affect the death benefit rules — it is the age at death that determines the tax treatment.
The first step is practical and free: log into every pension you hold and ensure your expression of wishes is completed and current. The second step, for those with larger pension pots who want to understand the April 2027 IHT changes in the context of their specific estate, is to book a free portfolio review where we can discuss the planning implications alongside the investment framework.
Sources & Further Reading
HMRC — Pension death benefits: tax rules for lump sums and drawdown. gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm073000
HM Treasury — Autumn Budget 2024: Pensions and Inheritance Tax consultation. Confirmation of DC pension IHT inclusion from April 2027. gov.uk/government/publications/autumn-budget-2024
Financial Times — Coverage of the Autumn Budget pension IHT changes and planning implications. ft.com/personal-finance
The Pensions Regulator — DC pension death benefits guidance. thepensionsregulator.gov.uk
MoneyHelper — Pension death benefits explained: nomination forms, drawdown inheritance, and tax rules. moneyhelper.org.uk/en/pensions-and-retirement/building-your-retirement-pot/passing-on-your-pension-when-you-die
PLSA — Pension death benefit policy guidance and trustee discretion framework. plsa.co.uk
Disclaimer: This article is for educational purposes only. Pension tax rules are subject to change. The April 2027 IHT changes are based on the October 2024 Autumn Budget announcement and the final legislative detail may differ. This does not constitute personal financial or legal guidance. For complex estate planning involving large pension pots, seek specialist professional guidance.
Alpesh Patel OBE
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