What happens to your pension when you die?
Most people assume their pension automatically goes to their spouse or family. That is not how it works — and the mistake of assuming so can have significant consequences, both for inheritance tax and for who actually receives the money.
Pensions sit outside your estate (usually)
Unlike most assets, defined contribution pensions do not usually form part of your estate for inheritance tax purposes. The pension sits in a trust managed by the pension provider, and the trustees have discretion over who receives it. This is enormously valuable from an IHT perspective — a pension pot of £500,000 passed on outside your estate avoids 40% IHT on that amount.
Note: from April 2027, the government has proposed bringing unused pension funds into the estate for IHT purposes. This is a significant change that is not yet law but is planned — worth monitoring if you have substantial pension savings.
The expression of wishes — the form that most people never fill in
Because the pension is in trust, it's the trustees who decide where it goes — not your will. However, trustees are guided by your 'expression of wishes' (sometimes called a 'nomination of beneficiary' form). This form, held by your pension provider, tells them who you want to receive the money. It is not legally binding, but trustees almost always follow it.
Defined contribution: lump sum or dependent's income?
If you die before taking your pension, the entire fund is typically available as a lump sum to your nominated beneficiaries. If you die after 75, income tax is paid by the recipient on withdrawals at their marginal rate. If you die before 75, it can often be paid completely tax-free.
If you're already in drawdown, the remaining pot passes to beneficiaries and they can continue drawing it down (a 'flexi-access drawdown' inherited fund) or take a lump sum.
Defined benefit: survivor pensions
Final salary and career average pensions typically pay a 'spouse's pension' — usually 50% of the member's pension — to a surviving spouse or civil partner. Some schemes also pay dependants' pensions for children. The exact terms depend on the scheme rules — check your annual statement or contact the scheme directly.
The State Pension
The State Pension does not transfer to a surviving spouse in the way it once did under the old system. However, if your partner reached State Pension age before 6 April 2016 (old system), you may inherit some or all of their additional State Pension. Under the new system (post-2016), limited inheritance provisions apply. Contact the Pension Service (part of DWP) to check what you're entitled to.
The lets you model your own pot — check the if you have multiple pots to locate and review.