Pension Guide: What Happens to Your Pension When You Die — UK Death Benefits, Nominations and Tax Rules for 2026/27

Pension money is held in trust. That single fact explains almost everything about how death benefits work. When you die, your defined contribution (DC) pot — a workplace scheme, a SIPP or a personal pension — isn't simply handed to your estate like a bank account. The scheme trustees decide who receives it, which is why the money can sit outside your estate for inheritance tax purposes.

For a DC pot, whatever is left when you die can normally pass to your nominated beneficiaries, whether as a lump sum or as drawdown income. Defined benefit (DB) schemes are far more restrictive: they can usually only pay a continuing pension to a dependant — a spouse, civil partner or a child under 23. Some schemes stretch to other nominees, but HMRC taxes those payments at up to 55% as unauthorised payments.

The first and cheapest step is nominating your beneficiaries. Every provider asks for an expression of wishes form. Providers aren't legally bound to follow it for DC pensions — and, ironically, that discretion is precisely what keeps the money outside your estate for IHT — but in practice they almost always honour it. Leave it blank and the provider decides, which may not match your intentions at all.

The tax treatment of an inherited pension hinges on one number: the age the person who died had reached.

Died before 75: beneficiaries can usually take the whole pot tax-free, as a lump sum or as drawdown income. Two conditions apply. The lump sum must be paid within two years of the provider being told of the death, and it must fit within the deceased's lump sum and death benefit allowance of £1,073,100.

Died at 75 or over: every payment — lump sums, drawdown income, annuity payments — is taxed as income at the beneficiary's marginal rate, which could be 20%, 40% or 45%. The provider deducts the tax before paying, so the beneficiary receives the net amount.

Three exceptions catch people out. A lump sum paid more than two years after the provider is told of the death is taxed regardless of the age at death. If the original holder died before 3 December 2014 and you buy an annuity from the pot, income tax applies. And any lump sum above the £1,073,100 allowance is taxed at your marginal rate, whatever the age at death. The full table is on GOV.UK.

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The 45% additional rate bites on beneficiaries already earning above £125,140 — a reminder that it's the beneficiary's own tax position, not the deceased's, that sets the bill.

Since the lifetime allowance was scrapped in April 2024, the lump sum and death benefit allowance has become the number that matters. For 2026/27 it is still £1,073,100, unchanged from the previous two tax years.

The allowance caps the total tax-free lump sum death benefits payable when someone dies before 75, across every pension scheme they held combined — not per scheme. It covers defined benefits, uncrystallised funds, pension and annuity protection, and drawdown funds. If total lump sums exceed it, the excess is taxed as income at the beneficiary's marginal rate.

The person dealing with the estate must tell HMRC when lump sum death benefits go over the allowance, within 13 months of the death or 30 days after they realise tax is owed — whichever is later.

Alongside it sits the standard individual lump sum allowance of £268,275, which caps the 25% tax-free lump sum you can take from your own pot while alive. They're separate limits that share the same post-lifetime-allowance framework. HMRC publishes both.

The annual allowance of £60,000 and the money purchase annual allowance of £10,000 govern contributions while you're alive. The annual allowance also tapers for high earners — down to £10,000 — once threshold income passes £200,000 and adjusted income passes £260,000. Those £200,000 and £260,000 limits have been unchanged since 2023/24, and they carry through into 2026/27. The annual allowance rules are here. Against that backdrop, £1,073,100 of death-benefit headroom is a generous ceiling for the overwhelming majority of savers.

Here's the mistake that costs families most: assuming your will controls your pension. It doesn't. A DC pension passes according to your expression of wishes form, not your will, because the scheme holds the money in trust and pays out at the trustees' discretion. You can rewrite your will tomorrow and your pension will still follow the nomination you signed three years ago.

Divorce is the classic trap. Unlike a will, a pension nomination isn't automatically revoked when a marriage ends. A form naming a former partner usually survives the divorce unless you actively change it, so the money can end up with someone you no longer intend to benefit. Remarriage, a new child, or a falling-out with a named beneficiary are all reasons to revisit the form now.

Keep a record of every pension you've ever held, not just the current one. Consolidating old workplace pots into a single SIPP makes nominations far easier to track than chasing a trail of providers from three jobs ago.

Providers review these forms periodically, but the responsibility to keep them current sits with you, not them.

The least-understood feature of DC pensions is succession. If you inherit a DC pot and leave it inside a flexi-access drawdown fund, you can nominate someone else to receive whatever remains when you die. Pension wealth can, in theory, roll through generations.

The tax treatment resets at every link in the chain. If the original holder died before 75, the first beneficiary receives the pot tax-free. But if that beneficiary later dies at 75 or over, the next recipient pays income tax on what's left. The age-75 test is applied afresh each time the pot changes hands, so a pot inherited tax-free today can become taxable in the hands of your children's children.

DB pensions don't offer any of this. They normally stop when the eligible dependant dies, with no right to nominate a further beneficiary. Some schemes guarantee payments for five or ten years, but the pension itself cannot be passed on indefinitely.

One subtlety is worth underlining: the discretionary nature of DC death benefits is what keeps them outside your estate for IHT. If you want your pension to go to a specific person, the nomination form is essential — but it's the provider's discretion that creates the tax advantage.

Related reading: tax planning hub · buying back missing NI years

There's no inheritance tax on the handover today, and no lifetime allowance charge to worry about either — the tax that does apply is income tax, and only once the age-75 line is crossed.

From 6 April 2027, unused pension funds and death benefits move inside the inheritance tax net for the first time. That is the single biggest shift in pension death benefit rules in a decade.

Today a pension sits entirely outside your estate for IHT. After April 2027 it counts towards it. With the nil-rate band frozen at £325,000 and the residence nil-rate band at £175,000 — the latter only if you pass your home to direct descendants, and tapering away by £1 for every £2 your estate exceeds £2 million — many families who have treated a pension as a tax-free inheritance vehicle will face an unexpected bill. The thresholds are set out on GOV.UK.

Put numbers on it. A single parent leaving a £500,000 home to their children, with £100,000 of savings and a £400,000 pension pot, currently passes the pension tax-free and pays 40% IHT on just £100,000 of the £600,000 non-pension estate. After April 2027 the £400,000 pot joins the estate, pushing it to £1 million — £500,000 above the combined £500,000 nil-rate and residence nil-rate bands. The total IHT bill becomes £200,000, of which £160,000 is caused by the pension pot alone, before any income tax if the parent died at 75 or over.

The harshest cases get hit three ways: IHT at 40% above the nil-rate band, income tax on the pension for deaths at 75 or over, and the loss of the residence nil-rate band as the pension drags the estate over £2 million. MoneyWeek reports that NFU Mutual calculates an effective 91.3% tax charge on inherited pension wealth for a married couple with £2 million of other assets and a £700,000 pension pot.

What can you do between now and April 2027? Make lifetime gifts — up to £3,000 a year is immediately exempt, and most larger gifts fall out of your estate after seven years. Consider an annuity, which swaps capital in your estate for income — see how a £100,000 annuity actually pays out. Taking your 25% tax-free lump sum early cuts the size of the pot and your estate, but raiding the whole pension in a panic to dodge IHT is its own mistake — it can cost you more than the tax you're trying to avoid. None of these is a panacea, which is precisely why professional advice pays for itself here. And don't overlook the simplest fix of all: updating your expression of wishes so the right person receives the pot in the first place.