What Happens to a Pension when Someone Dies in the UK?
Understanding what happens to a pension when someone dies is a crucial part of financial planning. In the UK, pensions can form a significant part of your estate, and the rules for passing them on vary depending on the type of pension, your age at death, and whether a beneficiary was nominated.
This guide explains how different pensions, such as defined contribution, defined benefit, and the State Pension, are handled after death. It also covers tax implications, recent legislative changes, and the steps beneficiaries need to take.
Whether you’re planning your own future or managing someone else’s estate, knowing these rules can help protect your loved ones financially and ensure a smoother process.
What is a Pension and Why is it Important to Plan Ahead?
A pension is one of the most significant financial assets that many people will accumulate during their lifetime. It is designed to provide income after retirement, but its importance doesn’t end there.
Understanding what happens to a pension when someone dies is a critical part of estate and financial planning, particularly for individuals who want to ensure their dependents or loved ones are looked after.
Failing to plan ahead can lead to confusion, delays, and even unexpected tax liabilities for the people left behind.
That’s why it’s essential to understand the rules that apply to different types of pensions in the UK, how beneficiaries are chosen, and the steps to ensure benefits are paid without unnecessary complications.
Who Can Inherit a Pension in the UK?
In the UK, the rules for who can inherit a pension vary depending on the type of scheme and the individual’s circumstances. Typically, pensions can be left to:
- Spouses or civil partners
- Children under 23 (or older if they have a disability)
- Financially dependent partners or other individuals
- Nominated individuals chosen by the pension holder
The provider or pension scheme trustee usually considers the deceased’s nomination form, but they may exercise discretion.
This flexibility ensures the right individuals receive the benefits, but it also makes it crucial for pension holders to keep their nominations up to date.
How Are Different Types of Pensions Handled After Death?
Different types of pensions are handled differently after death, and the outcome largely depends on the type of scheme. A defined contribution pension allows the remaining funds to be passed on to beneficiaries, often tax-free if the person dies before age 75.
A defined benefit (final salary or career average) pension typically provides a reduced income to a spouse, civil partner, or dependent. Annuities may continue if a joint-life or guaranteed term option was chosen; otherwise, payments stop.
The State Pension does not usually continue, but a surviving spouse may inherit certain benefits or entitlements.
Tax treatment varies, with age at death, especially before or after 75, significantly affecting whether beneficiaries receive the pension income tax-free or as taxable income.
What Are the Tax Rules on Inheriting a Pension?
One of the most crucial aspects of inheriting a pension is understanding the tax implications. The treatment differs based on the age at which the pension holder died and the type of pension benefit being received.
Pension Tax Treatment Based on Age at Death
| Age at Death | Tax Treatment for Beneficiary |
| Before age 75 | Benefits are usually paid tax-free (if within the LSDBA limit) |
| After age 75 | Income is taxed at the beneficiary’s marginal rate |
Lump Sum and Death Benefit Allowance (LSDBA)
As of April 2024, the Lifetime Allowance was replaced with the LSDBA, which limits the total tax-free amount that can be paid as lump sums or death benefits. Exceeding this threshold results in income tax charges.
From April 2027, some inherited pension funds will be included in the deceased’s estate for Inheritance Tax purposes, particularly if discretion is not exercised by trustees or administrators.
What Happens to a Pension when Someone Dies in the UK?
When someone dies, the fate of their pension depends on the scheme they held. Let’s break down each type of pension.
Defined Contribution Pensions
These pensions are based on how much you and your employer contributed, plus investment performance. Upon death:
- Before 75: The full pot can usually be passed on tax-free
- After 75: The beneficiary pays income tax on any withdrawals
- Beneficiaries may receive the pension as a lump sum, income drawdown, or purchase an annuity
If the pension holder was already taking income through drawdown, the remaining funds can usually continue to be used in the same way, subject to tax rules.
Defined Benefit Pensions
These pensions offer guaranteed income based on your salary and length of service. After death:
- A dependant’s pension may be paid to a spouse, civil partner, or eligible children
- Some schemes offer a death-in-service lump sum (often a multiple of your salary)
- If the pension was being paid and included a guarantee period, a lump sum may be paid equal to remaining payments
All income from defined benefit pensions is taxable and, from April 2027, some death benefits may be included in your estate.
Annuities
An annuity is a guaranteed income for life. What happens after death depends on the type chosen:
- Single-life annuity: Payments stop upon death unless a guarantee period exists
- Joint-life annuity: Your partner continues to receive a reduced income
- If value protection was selected, a lump sum may be paid to a beneficiary
State Pension
The State Pension generally stops at death. However, a spouse or civil partner may inherit some of it, depending on:
- When you both reached State Pension age
- Your National Insurance contribution history
The rules are complex and vary depending on whether the individual was on the basic or new State Pension system.
What Should You Do When a Loved One Dies with a Pension?
Dealing with a pension after someone dies involves several steps. Timely action ensures beneficiaries receive entitlements without delay or complications.
Step 1: Notify the Pension Provider
Start by contacting all known pension providers. If the employer or pension provider is unknown, a pension tracing service can help locate them.
Step 2: Gather Documentation
You’ll usually need:
- The death certificate
- Proof of identity of the beneficiary
- The pension scheme’s policy details
- Any nomination forms submitted
Step 3: Understand Scheme Rules
Pension schemes may have different rules for:
- Who qualifies as a dependant
- What benefits are offered
- Whether benefits are discretionary or directed
If benefits are discretionary, trustees will assess the case using the deceased’s expression of wish form.
Step 4: Consider Tax Implications
Take note of the tax status of any benefits, especially if the deceased was over 75 or if there’s a possibility of IHT from April 2027.
How Can You Nominate or Update Pension Beneficiaries?
Most pension schemes allow members to nominate one or more beneficiaries. This is usually done through an expression of wish form.
Keeping this form updated is crucial, especially after life events such as:
- Marriage or divorce
- Death of a previously nominated beneficiary
- Birth of children
- New partnerships or dependants
Although not legally binding, trustees generally follow your wishes unless there is a strong reason not to.
| Nomination Type | Trustee Discretion? | IHT Impact (from 2027) |
| Discretionary nomination | Yes | May remain outside the estate |
| Directed nomination | No | Counted in estate for IHT |
Always review your nominations regularly and consult a financial adviser if unsure about your options.
Can a Pension Be Lost if No One Claims It?
A pension cannot be lost, but it can go unclaimed if no one notifies the provider or if beneficiaries are unaware of its existence. Unclaimed pension pots usually remain invested or held by the provider, while payments from annuities or defined benefit schemes stop after the member’s death.
To prevent this, ensure your beneficiaries know about your pension arrangements and that your provider has your current contact details. It’s also important to have a will or an expression of wish form that clearly outlines who should receive your benefits.
If family members are unsure about any pension details, pension tracing services can help locate unclaimed schemes and recover the money due.
How Can You Avoid Tax and Legal Issues with Inherited Pensions?
Planning ahead can prevent complications and tax burdens for your beneficiaries. Consider the following:
- Use discretionary nominations to potentially reduce IHT exposure
- Keep beneficiary forms up to date
- Consult a financial adviser about how to structure your pension withdrawals
- Explore using trusts if your pension pot is substantial
Reviewing your pension alongside your estate planning can help ensure your wishes are followed and your loved ones are financially secure.
Conclusion
Understanding what happens to a pension when someone dies in the UK is more than a legal formality, it’s a key part of responsible financial planning.
By knowing how different pensions are treated, updating your beneficiary details, and planning for upcoming tax changes, you can ensure that your pension supports the people you care about, even after you’re gone.
Whether you’re managing your own pension or dealing with the estate of a loved one, taking the right steps now will bring clarity and peace of mind in the future.
Frequently Asked Questions
Can a pension be split between multiple beneficiaries?
Yes, many pension providers allow you to name more than one beneficiary. The percentage split should be clearly stated in your nomination.
What happens if the deceased had multiple pension schemes?
Each scheme must be contacted separately. The rules, benefits, and tax treatment may vary depending on the scheme and provider.
Do pensions always avoid probate?
Pensions usually fall outside of probate if a beneficiary is nominated and the scheme is discretionary. Directed benefits may form part of the estate.
Will inheriting a pension affect my Universal Credit or benefits?
It could, depending on how the pension is paid (e.g. lump sum vs. regular income) and how it impacts your total financial resources.
Can I refuse to inherit a pension for tax reasons?
Yes, it’s possible to disclaim or redirect the pension benefits, often by notifying the scheme provider in writing. This must be done within certain time limits.
What is the two-year rule for pension death benefits?
To benefit from tax-free status (if applicable), the pension benefits must be paid or designated within two years of the provider being notified of the death.
Are there any limits on how much pension you can inherit tax-free?
Yes. As of April 2024, the LSDBA cap is £1,073,100. Amounts above this may be taxed, especially if the deceased died before age 75.
