What Happens to My Pension When I Die?

Saving into a pension pot is a great way to prepare for retirement. For most people, it’s one of the biggest sums of money they’re likely to save in their lifetime. But what happens if you die before your savings run out? Does your money just disappear, or is there a way to make sure your loved ones can benefit?

We’ve created this guide to eliminate confusion and clarify what happens to your pension when you die, so you can plan for the future with confidence. Whether you’re aiming to take the state pension, your workplace pension, or a personal pension, we’ll explain what might happen and how you can prepare.

Your state pension is the money the government pays you in retirement, if you’re eligible. The introduction of the new state pension in 2016 means that, for most people, their state pension is based solely on their individual National Insurance contributions and can’t be passed on to someone else. However, your spouse may qualify for an additional pension payment, but this is only applicable under certain conditions, such as if you deferred taking your pension.

If you’re on the older side (born before 1951 for men, or 1953 for women), you may be on the old state pension arrangement. There are more options for inheritance here, so your spouse might be able to use your National Insurance record to get extra payments.

Since 2018, all employers have been required to enrol their employees automatically into a workplace pension. This means that if you are or have been an employee, you’re likely to have at least one workplace pension. The type of workplace pension will determine what happens to it when you die.

A defined contribution (or DC) pension is a pot that builds up over time as you and your employer contribute. The pot is invested by your provider, which usually leads to growth over the decades. The final amount will depend on how much you and your employer save, as well as the performance of the investment. This means the final pot size and the money you can take in retirement aren’t guaranteed.

If you pass away before taking a defined contribution pension, the money will go to any beneficiaries you nominate (see below on how to make your wishes clear). If you don’t nominate a beneficiary, the funds may go to your estate.

If you have already started to take your DC pension, the way you take it can affect how it’s passed on after your death. If you opt for a drawdown (accessing a lump sum but leaving the rest invested), the remaining amount in the pot can be inherited by your beneficiary.

If you opt for an annuity (an arrangement where you receive regular payments from the pension pot), your payments may stop when you die. However, it may be possible to arrange for the payments to go to a beneficiary if the rules of your scheme allow.

A defined benefit (or DB) pension is where you have a guaranteed pension income once you retire (normally a portion of or average of your salary).

Your scheme may pay some of this income or a lump sum to an eligible beneficiary, but there may be rules around who this could be. For instance, you may be limited to a spouse or a dependent child.

Your beneficiary may be able to get a portion of the income payment if you die after retirement age, or a lump sum if you die beforehand.

Your workplace or union may offer a death in service benefit. This means that if you die while still working and contributing to your workplace pension, your loved ones will receive a lump sum payment (normally 2-4 times your pensionable pay). They may also get access to regular pension payments from your pot (called a Dependant’s Pension), although this is increasingly uncommon.

As with your workplace pension, you can nominate a loved one to inherit your private pension (aka SIPP pension) by naming a pension beneficiary. If you don’t nominate anyone, your pension provider will make a decision about who gets your savings.

You can usually nominate a pension beneficiary by completing an ‘Expression of Wish’ form and returning it to your pension provider. You may be able to do this online.

You’ll need to give your name, National Insurance number, and pension account number. You’ll also need the name, date of birth, and address of all the beneficiaries you want to nominate.

If you have a defined contribution pension, you can nominate anyone as a beneficiary. If you have a defined benefit workplace pension, there may be rules that define who is eligible to inherit, for example, they may need to be your spouse.

You should update your nominated beneficiaries if your relationship status changes. If you don’t nominate anyone, the provider will usually work through a hierarchy of relationships, starting with a surviving spouse, then children and dependents, and then potentially other relatives.

If someone inherits a pension from you, they may need to pay tax. The tax payment rules differ depending on the age at which you die (i.e., under or over 75), the type of pension, and how the money is paid out.

For example, if you die under 75, a lump sum can be paid to your beneficiaries without tax owed. If you die over 75, they’ll need to pay income tax on that sum. If you’re under 75 and receiving an annuity from a drawdown fund set up after 2015, there’s no tax owed. If you’re over 75, they’ll pay income tax on the money they get from the annuity fund.

It’s important to know that from 2027, pensions will no longer be exempt from inheritance tax. The standard rate of inheritance tax is 40%, but it’s only payable over the £325,000 threshold. It’s important to note this won’t apply if you’re a married or civil partner passing your estate to your spouse.

Filling in the Expression of Wish form lets your provider know what you would like to happen to your pension savings, but they aren’t legally obliged to comply if they feel the beneficiary isn’t the most appropriate person. For example, if you had children who weren’t nominated, they might decide to give them some of the money.

You can name multiple beneficiaries, which could help ensure that if one were to pass away, your money will still go to someone you care about. However, too much complexity could slow down the inheritance process.