What happens to your pension when you die?
A number of factors dictate what the beneficiaries will inherit
No one likes to think about what happens after they die, but there are some topics you just can’t afford to avoid.
This is especially true when it comes to your pension.
After all, you’ve spent your life working hard to amass that money, so if the worst happens, you want to ensure it goes to the people you care about.
For most private pension schemes your remaining pot can be passed on to your beneficiaries. For the state pension, it’s a little more complicated. By mid-2027, there will also be inheritance tax considerations added into the mix.
Here, Telegraph Money takes you through what you need to know:
- What happens to your pension when you die?
- Types of pensions
- Options for beneficiaries
- Tax implications for beneficiaries
- Conclusion: What you should do to prepare your pension?
- Pension FAQs
What happens to your pension when you die?
Passing away will mean different things for different types of pensions. For example, private pension payments are not the same as state pension payments, and even the type of private pension you have will be a major factor in determining what happens after you die.
When you die you will either be able to pass on your pensions to a beneficiary or it may stop altogether, depending on what type of pension it is and how it operates.
A good first step is making sure you know what type of pension you have – you can find out what happens to each type of pension below.
Types of pensions
Here, we will take you through the different types of pension and what it could mean for how yours operates on death.
1. The state pension
Your state pension will usually stop when you die. However, if you leave behind a wife, husband or civil partner they may be able to receive some of your allowance or get an uplift to theirs. Various factors affect this such as your age, whether you die before or after state pension age, and if they remarry or form a new civil partnership before they reach state pension age themselves.
If your partner reached state pension age before April 6, 2016, they may be able to increase their own state pension or inherit extra payments based on your National Insurance record. If you deferred your state pension and hadn’t claimed it when you died, they could inherit this too.
If they reach state pension age after this, the rules are less generous. They can’t top up their state pension (unless they’re a woman and meet certain conditions) or receive your deferred amount if you died before claiming it. However, they might still be able to inherit some of your state pension, subject to certain conditions. There are lots of things to consider.
Jackie Spencer, of the Money and Pensions Service said: “If you die, your civil partner or spouse may be able to increase their basic state pension by up to £176.45 a week. This is dependent on what they are receiving as their basic state pension and your National Insurance contributions. They will also need to be over state pension age.
“If you are not married or in a civil partnership when you die it may also be possible for your estate to claim up to three months of your basic state pension, which will go to the beneficiaries. This is only if you had not claimed your pension.
“There may also be some other money in the form of additional state pension, a protected payment, or extra state pension, or lump sum. This depends on whether you were in a marriage or civil partnership before 6 April 2016 and some other criteria.”
The Government provides a useful tool that you can tailor to your circumstances.
2. Workplace pension
What happens to your workplace pension after you die depends on what type of pension it is. There are two main types; defined contribution pension and defined benefit or final salary pension.
- Defined contribution pensions
In a defined contribution pension (sometimes called a “money purchase scheme”), you build up a “pot” with your contributions and those from your employer that is then invested for you. The size of that pot when you retire determines the level of income you can get.
It can usually be passed on in full to your beneficiaries.
While a defined contribution scheme doesn’t have to be linked to your employment, it often is.
Tom Selby, of AJ Bell, said: “If you have a defined contribution pension, such as a self-invested personal pensions, you can nominate as many people as you like to inherit your retirement pot, or portion of your pot.”
- Final salary pensions
The rules are different for final salary pension schemes, also known as defined benefit schemes, where the pension is based on your salary and how long you’ve worked for your employer. They are becoming rarer these days but around 700,000 people across the UK are still active members of one.
What happens when you die will depend on the terms of your pension, which may differ depending on the provider. Different professions are also part of different pension schemes that come with their own rules, such as the police, the NHS and teachers.
Your plan may continue to pay out to a spouse, dependant children, disabled child of any age or others who are financially dependent on you. Your plan may also include other benefits that will be paid to a beneficiary as a lump sum, such as a death in service benefit. However, this will also be determined by your provider.
You should check with your provider to make sure you’re happy with what you’re leaving behind. Commonly, if you have no dependants, all payments will stop when you die.
3. Drawdown pension and annuities
When you reach normal pension age (currently 66), you have the same options – withdraw it as a lump sum, use it to buy an annuity or continue with a drawdown. If you opt for a drawdown pension, you can take money from your pot as and when you need it. Meanwhile, the rest of the amount stays invested and continues to gain value.
If you die, your beneficiaries will have access to your pension and they have the same options. However, some funds do not allow beneficiaries to drawdown savings in the same way as the original owner so they may have to transfer your fund to a provider that does.
If you take an annuity, it will often stop when you die unless you opted for one that continues, such as a joint-life annuity. This will provide an ongoing income for the rest of the beneficiary’s life, or until the age of 23 for a dependent child.
Options for beneficiaries
Your beneficiary will generally need to contact your pension provider and inform them you have passed away.
If you died before you drew it, they will have a choice to make: take it as a lump sum, use it to buy an annuity or run it as a beneficiary drawdown. The full list of options for beneficiaries is laid out in the table below.
Who can be a beneficiary?
A beneficiary is the person or people who will receive your pension funds when you die. This can be any one you like, but people commonly choose their:
- Spouse, civil partner or partner
- Children, or other dependents
- Sibling or siblings
- Parents
Exactly who benefits tends to be dictated by what is known as an “expression of wishes”.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “This form allows you to name who you would like to receive death benefits. Administrators and trustees will refer to them when dealing with your pension.”
It’s crucial to keep your ‘expression of wishes’ forms updated to ensure your plans are carried out. However, recent research from the Money and Pensions Service showed that one in five people didn’t know who they’d nominated to receive any of their private pensions.
Ms Morrissey added: “If these are not kept updated there is a risk your benefits could, for example, get paid out to an ex-partner rather than your current one. This can cause huge financial pressures.”
It’s vital to revisit these forms following key life events, such as marriage and divorce, to make sure the right person benefits.
What if there are no beneficiaries?
In the absence of any beneficiaries, your pension provider will make the decision. If you have a next of kin, your pension will generally go to them. If you don’t, it becomes part of your estate – and liable for inheritance tax.
Tax implications for beneficiaries
When you die, your beneficiaries may have to pay income tax on your pension. Inheritance tax doesn’t currently apply to your pension as it’s not considered part of your taxable estate, but this will chance in 2027. Income tax can be due, but it depends on when you die.
Will my family pay inheritance tax on my pension?
Currently, pensions are not considered for inheritance tax calculations. However, this will change from April 2027 after Rachel Reeves announced changes in her maiden Budget.
The thresholds have remained the same, so for a married couple passing on a home to direct descendants, inheritance tax isn’t due on the first £1m. For single people without children however, it’s just £325,000. When property, savings and now pensions are considered, inheritance will be a consideration for a growing number of people.
It could leave some grieving families paying an effective tax rate of over 90pc on a loved one’s pension.
What happens if I die before the age of 75?
If you die before 75, your beneficiaries won’t usually have to pay income tax. This is as long as the money is accessed within two years.
What happens if I die after the age of 75?
If the money is accessed after more than two years, or you die after 75, they’ll have to pay their normal rate of income tax.
Previously, there was an additional tax charge for anything beneficiaries received from a pension over the Lifetime Allowance of £1,073,100. This was removed from April 6, 2023 and abolished the following year. However, they will still need to pay income tax on anything they receive over this amount.
If a lump sum is taken, they’ll pay income tax on anything over £268,275 – regardless of your age when you die.
Conclusion: What you should do to prepare your pension
Ultimately, the decision of what happens to your pension after you die is yours so make sure you have your chosen beneficiaries recorded.
However, be aware that pensions can be complicated at the best of times, particularly when it comes to passing the pot on to others. Once you’re gone your loved ones could be restricted by the choices you’ve made. With pensions becoming considered for inheritance tax from 2027, the situation is more complex than ever for those with large estates.
It’s always worth considering professional advice to ensure your pension wealth is passed on in line with your wishes.
Pension FAQs
Can my spouse inherit my pension?
Yes, your pension provider will ask you to name beneficiaries who will receive your pension funds when you die.
The recipient can be anyone you choose including your spouse, children, any dependents or anyone else.
How can I ensure my pension goes to my chosen beneficiary?
You will generally pick your beneficiaries when you join a pension scheme. However, you can change your mind at any time. Just get in touch with your provider, either by phone, post or logging on to your online account. It won’t cost you anything and you can change them whenever you like.
If you don’t name anyone, your pension provider will make a decision. If you have a next of kin it will generally go to them. If you don’t, it becomes part of your estate – and liable for inheritance tax.
You can also opt to leave it to a charity.
Until 2027, your pension is not part of your estate – so it’s not covered by your will. Your provider isn’t legally bound by your wishes, but will take them into account.
Can I use a pension to reduce inheritance tax?
Historically, pension savings haven’t been subject to inheritance tax, and have therefore been a very tax-efficient way to save for your beneficiaries. This is all due to change come April 2027 under government plans to bring pension savings inside the scope of the tax.
While the change hasn’t yet been confirmed, or come into force, many Telegraph readers have been in touch to tell us how they’re changing their inheritance tax planning as a result.
What happens to my annuity when I die?
An annuity plan converts your pension savings into a guaranteed income for a set amount of time, or for life. Your beneficiaries’ options will depend on what you chose when you purchased the annuity, so it’s something you should think through carefully.
If you purchased a single life annuity, payments generally will stop when you die. However, you can select add-ons that provide continuing payments for a set period or a lump sum to your nominated beneficiary.
Some people purchase a joint life annuity, which provides regular payments for them and someone else. Usually this is your spouse and lasts until you both die, but it can also be a child until they reach the age of 23. Payments will usually cease afterwards.