What happens to your pension when you die?
Who will inherit my pension?
Pension savings aren’t usually covered in a Will because they normally fall outside of a person’s estate, meaning there’s usually no inheritance tax to pay on them. It’s up to you to tell your pension provider who you’d like to inherit these savings when you die. This nomination isn’t legally binding but must be considered by the pension’s trustees.
It makes sense to review your nominated beneficiaries regularly, especially when there’s a change in your circumstances. You can choose to nominate as many people as you like, or even charities, and decide what portion you’d like each of them to get.
If you have an HL Self-Invested Personal Pension (SIPP) you can update your nominated beneficiaries through ‘account settings’ in your online account. You can also print and return an expression of wish (nomination) form if you’d prefer.
What are the private pension rules after death?
Normally anything left in your pension can be passed on tax-efficiently. Who receives what’s left and how will depend on:
- the type of pension you have and what you’ve done with it
- whether you’ve confirmed your beneficiary preferences with your provider
- your age when you die - before or after 75
Remember that pension and tax rules can change, and any benefits will depend on individual circumstances.
Pension beneficiary rules
If you’ve left your pension untouched, you’re in drawdown or you’ve made lump sum withdrawals (also known as UFPLS), your loved ones will usually have two options when deciding how to receive your pension wealth.
The inheritance can be passed on as a cash lump sum and paid into their bank account(s), or they can convert the pension into their own name(s).
If your beneficiaries convert the pension savings into their own name, they can choose to exchange the value for a secure income (an annuity), or keep it invested (through drawdown).
An annuity will normally pay a regular, secure income for the rest of their life. Drawdown allows them to keep the pension invested and withdraw an income as and when they like. With drawdown they’ll also be able to pass on anything that’s left to future generations when they die.
What happens to my pension annuity when I die?
If you choose to exchange your pension for a lifetime annuity, payments will stop when you die, unless you choose certain options at the start of the contract.
You can’t usually change the terms of your annuity once it's set up, so make sure you’re aware of all your options before you apply.
These options allow you to pass on your annuity as a cash lump sum or regular income payments to your spouse, partner, other beneficiaries, or your estate depending on the option you choose.
What you do with your pension is an important decision that you might not be able to change. You should check you're making the right decision for your circumstances and that you understand all your options and their risks. The government's free and impartial Pension Wise service can help.
New lump sum and death benefit allowance
From 6 April 2024, 3 new allowances, including the lump sum and death benefit allowance, replaced the lifetime allowance rules.
The lump sum and death benefit allowance applies to the tax-free part of some lump sum payments as well as the tax-free element of certain non-taxable lump sum death benefits.
For most people the lump sum and death benefit allowance is £1,073,100. Your lump sum and death benefit allowance could be different if you have lifetime allowance protection.
How will this impact my beneficiaries if they inherit my pension as a lump sum, beneficiary drawdown or an annuity?
Lump Sums
Like under the old lifetime allowance rules, if you die before age 75, any lump sums your beneficiaries get that are within your remaining lump sum and death benefit allowance will normally be free of income tax.
If any part of the lump sum goes over your remaining lump sum and death benefit allowance, then the excess will normally be taxable at your beneficiaries’ marginal rate. If you die aged 75 or over, your beneficiaries will have to pay tax at their marginal rate on any lump sum taken.
Beneficiary drawdown or annuity
Like under the old rules, if you die before age 75, any income payments your beneficiaries get from a beneficiary’s drawdown or beneficiary’s annuity will normally be free of income tax. Unlike with most lump sum death benefits, the amount that can be inherited via beneficiary drawdown or annuity isn’t subject to the new allowances. If you die aged 75 or over, any income payments your beneficiaries get from a beneficiary drawdown or beneficiary annuity will be subject to income tax at their marginal rate.
What happens to my State Pension when I die?
State Pension payments will usually stop once the Pension Service has been informed of your death.
Your spouse or civil partner may be able to inherit some of your payments or increase their State Pension payments based on your National Insurance record, but the possibilities will depend on, amongst other things, your State Pension ages and the date of your marriage/civil partnership.
To find out more visit gov.uk.
What happens to my other investments when I die?
Anything held outside of your pension can be passed on to your loved ones too, but you should plan and make a Will. Options will depend on the type of accounts you have.
Expert support and advice
Guidance from Pension Wise
Pension Wise is a free government service for people getting ready to receive a UK defined contribution pension (this could be a personal or workplace pension).
It offers impartial guidance on pension types, how to access savings, and the tax implications of each option.
Helpdesk support
Our Bristol-based helpdesk are here for you six days a week. Our friendly and knowledgeable team are ready to answer your questions no matter how big or small.
Please contact us or schedule a callback at your convenience.
Advice on your retirement plans
Our financial advisers can help you develop a retirement income strategy, ensuring your investments align with your goals.
They'll advise you on the best time and methods for accessing your pension.
Advice on your retirement plans
Our financial advisers can help you develop a retirement income strategy, ensuring your investments align with your goals.
They'll advise you on the best time and methods for accessing your pension.