Pension Guide: What Happens to Your Pension When You Die — UK Death Benefits, Nominations and Tax Rules for 2025/26

When a pension holder dies, what happens to their pension depends on the type of scheme they were in. For defined contribution (DC) pensions — including SIPPs, workplace pension — check the Pensions Regulator (thepensionsregulator.gov.uk) for scheme compliances, and personal pensions — the remaining pot can usually be passed on to nominated beneficiaries. The money does not automatically form part of your estate, which is why pensions have historically been so powerful for inheritance planning.

For defined benefit (DB) pensions, the rules are more restrictive. A DB pension can typically only pay a continuing pension to a dependant — usually a spouse, civil partner, or child under 23. Some schemes allow payments to other nominees, but these may be taxed at up to 55% as unauthorised payments.

The critical first step is nominating your beneficiaries. Every pension provider allows you to complete a nomination form (sometimes called an 'expression of wishes') specifying who should receive your pension on death. While providers are not legally bound by these nominations for DC pensions — the discretionary nature is actually what keeps the money outside your estate for IHT — they almost always follow them. If you have not made a nomination, the provider will decide who receives the benefits, which may not align with your wishes.

The tax treatment of inherited pension benefits hinges on a crucial threshold: whether the pension holder died before or after age 75.

Death before age 75: Beneficiaries can usually receive the pension pot completely tax-free, whether taken as a lump sum or as income through a drawdown arrangement. This applies provided the lump sum is paid within two years of the provider being notified of the death, and the total does not exceed the deceased's lump sum and death benefit allowance of £1,073,100.

Death at age 75 or over: Any payments to beneficiaries — whether lump sums, drawdown income, or annuity payments — are taxed as income at the beneficiary's marginal income tax rate. The provider deducts income tax before making payments.

There are some important exceptions. If the lump sum is paid more than two years after the provider is told of the death, income tax applies regardless of the age at death. Additionally, if an annuity was purchased from the pot and the original holder died before 3 December 2014, income tax applies even if they were under 75.

Related reading: See our pensions hub · Spring Statement 2026 · PensionBee Review

Since the lifetime allowance was abolished from 6 April 2024, the lump sum and death benefit allowance has become the key threshold for pension death benefits. For 2025/26, this allowance stands at £1,073,100.

This allowance caps the total amount of tax-free lump sum death benefits that can be paid when someone dies before age 75. It applies across all of a person's pension arrangements combined — not per scheme. If total death benefit lump sums exceed this allowance, the excess is subject to income tax at the beneficiary's marginal rate.

The person administering the estate must notify HMRC if lump sum death benefits paid to beneficiaries exceed the allowance. They have 13 months from the date of death, or 30 days after they realise tax is owed (whichever is later), to make this notification.

Separately, the standard individual lump sum allowance of £268,275 limits the tax-free pension commencement lump sum (the 25% tax-free lump sum you can take from your own pension). These are distinct allowances but both draw from the same underlying framework introduced when the lifetime allowance was removed.

One particularly powerful feature of defined contribution pensions is pension succession — the ability for a beneficiary to pass on an inherited pension pot to the next generation. If you inherit a DC pension and place it into a flexi-access drawdown fund, you can nominate someone else to receive whatever remains when you die.

This creates the potential for pension wealth to pass through multiple generations without being spent. However, there are important caveats. The tax treatment resets each time: if the original holder died before 75, the first beneficiary receives the pot tax-free, but if that beneficiary then dies at 75 or over, the next recipient pays income tax.

For defined benefit pensions, succession is much more limited. A DB pension typically ceases when the eligible dependant dies, with no option to nominate a further beneficiary. Some schemes offer a guaranteed payment period (often 5 or 10 years), but the pension itself cannot be passed on indefinitely.

It is also worth noting that pension death benefits are usually paid at the provider's discretion. This discretionary nature is precisely what keeps the money outside the deceased's estate for inheritance tax purposes. If you want your pension to go to someone specific, a nomination form is essential — but it is the provider's discretion that provides the IHT protection.

Related reading: tax planning guide, Missing NI Years Cost You £342 a Year in Lost Pension — Here.

The Autumn Budget 2024 announced a significant change that will take effect from 6 April 2027: unused pension funds and death benefits will be brought within the scope of inheritance tax for the first time. This is arguably the biggest shift in pension death benefit rules in a decade.

Currently, pensions sit entirely outside the IHT net. From April 2027, the value of unused pension pots will count towards the deceased's estate for IHT purposes. With the IHT nil-rate band frozen at £325,000 (plus the £175,000 residence nil-rate band for those passing a home to direct descendants), many families who have used pensions as an inheritance planning vehicle will face unexpected tax bills.

The government's rationale is that pensions are meant for retirement income, not as a tax-free inheritance vehicle. However, the change creates a planning window: between now and April 2027, pension holders may want to review their overall estate planning, consider whether drawing down pension income earlier makes sense, and potentially restructure how they pass on wealth.

For those with substantial pension pots, the interaction between IHT (at 40% above the nil-rate band) and income tax on pension death benefits (for deaths after 75) could create complex double-taxation scenarios. Professional financial advice is strongly recommended for anyone whose combined estate — including pensions — exceeds the IHT thresholds.

This article is for informational purposes only and does not constitute regulated financial advice. Readers should consult a qualified financial adviser before making decisions about pension planning and estate planning.

Sources: gov.uk pensions overview, MoneyHelper pension guidance.