Pensions and inheritance tax rules

What happens to my pension when I die?

Typically state pension payments will stop when you die. However, there may be some occasions where a spouse or civil partner will continue receiving some payments. For example, a portion of any additional state pension or protected payments, may be passed on. 

However, this will depend on when you got married and whether you reached state pension age before or after April 2016, when the new state pension replaced the basic state pension. 

You can find out more about inheriting state pension rules here. 

Who inherits my pension?

This depends on the type of pension you have.

If you have a defined contribution pension, you can nominate who inherits your pension. It is possible to nominate just one person, multiple people or a charitable organisation as beneficiaries.

However, many salary-based defined benefit pension schemes can only be inherited by your dependants (a spouse, civil partner, children under 23 or someone else who is financially dependent on you).

How do I choose who inherits my pension?

The method of nominating a beneficiary will depend on your provider. Many providers allow you to nominate your beneficiaries online by completing an ‘expression of wishes’.

Will my beneficiaries pay inheritance tax on my pension?

Currently, your beneficiaries will not normally pay inheritance tax on your pension. However, from 6 April 2027 pensions will form part of your estate for IHT purposes. This means that if you have exceeded your tax-free allowances you will have to pay IHT on any unused pension wealth. 

What happens to my SIPP when I die?

Once your nominated beneficiaries have inherited your SIPP, they are free to decide how they’ll access it. For example, they may take the money out in one or more lump sum withdrawals, or take an income from it. However, there’s no obligation to make any withdrawals from the pension, and if they prefer, they can leave the pot invested until they need it. 

If the beneficiary dies before withdrawing all the funds, the money can be passed on to beneficiaries of their choice. These are referred to as successors. It’s also important to note that only nominated beneficiaries, dependants and successors can use drawdown. Other beneficiaries will need to take the money as a lump sum. 

Whether your beneficiaries will pay tax on the SIPP funds they inherit will depend on how old you are when you die:

• If you die before age 75: Beneficiaries usually pay no income tax on inherited SIPPs, whether they take the money as income or a lump sum. However, for lump sums to be paid tax-free, you must have enough Lump Sum and Death Benefit Allowance (LSDBA) remaining. This allowance caps tax-free pension benefits at £1,073,100 for most people. Find out more about lump sum allowances.
• Timing is important to ensure payments are made tax-free. Lump sum payments will need to be made within two years of death. Or, if beneficiaries decide to use drawdown, they will also need to ‘designate’ the funds within two years (this is the process of transferring them into their name).
• If these deadlines are missed, income tax may be payable. If you were already in drawdown at the time of your death, and your beneficiaries wanted to take a lump sum, the funds would also need to be paid within two years, otherwise income tax would be charged. The two-year rule doesn’t apply if you were in drawdown and your beneficiaries decide to use drawdown too.
• If you die at age 75 or older: Individual beneficiaries will need to pay income tax on income and lump sum withdrawals at their marginal rate of tax. Payments into trusts will be taxed at 45%. However, when beneficiaries access the money they will get a tax credit which can be offset against their own tax bill. 

What happens to my final salary pension when I die?

Unlike defined contribution pensions, a final salary defined benefit pension is not a finite pot of money. Therefore, you will not have a remaining pot of money to pass on when you die.

Depending on the terms of your pension, you may be able to leave some money for your family when you die. Many defined benefit pension schemes do have a provision for leaving money to a dependent (your spouse, civil partner or a child under 23). Some schemes may allow you to pass on money to someone else, but that money is likely to be subject to additional tax.

Read more on death benefits for defined benefit pensions.

What happens to my annuity when I die?

Your annuity might continue providing for your family when you die. Whether or not it does depends on the terms of the annuity you bought.

Single life annuities tend to offer better rates while you are alive but stop paying out after you die.

Joint life annuities will continue to pay out to your spouse after you die, but stop when they die.

Some annuities have guarantees that ensure they will continue to pay out for a fixed number of years even if you die during that time period.

It is also possible to buy a value protected annuity. When you die, this type of annuity pays out any difference between your total received annuity payments and the amount you originally bought it for.