What happens to my pension when I die?

Your pension is likely to represent a significant proportion of your overall wealth, so it's important to understand what happens to this money when you die.

If you've already made plans to pass money on to your loved ones via your pension, you'll need to factor in new rules that could make this subject to inheritance tax from 2027.

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Who will inherit my pension when I die?

It depends on the type of scheme. With defined contribution pensions - the most common type of private pension - you can choose a 'nominated beneficiary' who will inherit this money. 

You can fill in or update what's known as an 'expression of wish' form with this information by logging in to the online account for each pension you hold, or contacting the scheme directly. 

With defined benefit schemes, it's usually only spouses and civil partners who can inherit payments. You'll need to check the rules of your own scheme.

• Find out more: how to track down old pensions

Are pensions subject to inheritance tax?

Not at the moment. Pensions have been seen as a useful tool for estate planning because of this exemption. 

However, from April 2027, pensions will be brought within the scope of inheritance tax.

From then on, money left in defined contribution pensions will be added to the rest of your estate, meaning that it could be subject to inheritance tax if the total value of your estate exceeds the tax-free allowance. 

• Find out more: how to reduce an inheritance tax bill

Do I need to worry about inheritance tax?

The government has said that bringing unspent pensions into the scope of inheritance tax will affect around 8% of estates each year.

Most people do not have to pay inheritance tax, as it's only payable once your estate exceeds a certain value. 

The nil-rate band is £325,000 per person, with an extra £175,000 (the residence nil-rate band) available if you’re passing your main home on to your children. 

This means couples who leave their home to their children can give away up to £1m tax-free.

What happens to my private pensions when I die?

The rules vary depending on the type of pension you have, and whether or not you've started taking money from it.

I have a defined contribution pension I haven’t taken money from

With defined contribution pensions, the amount you end up with at retirement depends on the contributions you - and your employer, if it's a workplace scheme - have made, and how the investments in your pension have performed.

If you die before you reach the age of 75, you can usually pass your defined contribution pension tax-free to a nominated beneficiary.

The most a beneficiary can take from all your pensions as a tax-free lump sum is £1,073,100.

If you die aged 75 or over, your beneficiaries will normally pay income tax when they withdraw money from your pension.

From April 2027, regardless of your age when you die, inheritance tax may be charged on money left in your pension if the value of your overall estate exceeds the tax-free allowance. 

I'm in pension drawdown

If you die before the age of 75 and leave money in pension drawdown, your beneficiaries don’t have to pay income tax on the money they withdraw.

If you die when you’re 75 or over, your beneficiaries will have to pay income tax on any income they take from your drawdown plan.

I have an annuity

An annuity pays a guaranteed regular income for the rest of your life. 

With many types of annuity, payments will stop when you die.

But if you opt for a joint-life annuity, payments will continue to your named beneficiary - usually at two thirds or half of the original payments. 

I have a defined benefit pension I haven’t taken money from

Defined benefit pensions, also known as a final salary pensions, provide a guaranteed income at retirement which is usually based on how many years you’ve been part of the scheme and your final pay or average salary over your career. 

If you die before taking your defined benefit pension, the scheme will usually pay out a lump sum to your spouse or civil partner. This will typically be two or three times your salary. 

I'm receiving money from a defined benefit pension

Defined benefit pensions usually continue to pay out to your spouse or civil partner if you die after reaching the scheme’s pension age. 

These payments vary depending on the scheme, but they're usually around 50% of what you would have received. 

If you are unmarried or widowed and have children, some defined benefit schemes offer payouts to those under 18, or under 23 if they're in full-time education. 

Can I pass on my state pension?

If you are married or in a civil partnership, when one of you dies, the surviving partner may be entitled to an increased state pension - but the rules vary depending on when you reached state pension age.

If you die before you reach state pension age, no-one will be able to inherit your state pension.

I reached state pension age before 6 April 2016

You are covered by the old state pension, which is made up of two parts: the basic state pension and the additional state pension. 

When you die, your spouse or civil partner could be entitled to receive a higher basic state pension based on your National Insurance record (assuming they're receiving less than the full basic state pension).

Your spouse or civil partner might also inherit part of your additional state pension if your marriage or civil partnership began before 6 April 2016.

I reached (or will reach) state pension age after 6 April 2016

You are covered by the new state pension, where payments are based on your own National Insurance contribution record. 

Under these rules, you can no longer inherit additional state pension from a late spouse or civil partner.

However, there are some exceptions that ensure no one is worse off than they would have been under the old scheme.

• Find out more: how much state pension will I get?