What happens to your pension when you die?

Hi I’m Charlene Young, senior pensions and savings expert here at AJ Bell. In today’s video, we’re answering a question lots of people might want to ask but few feel comfortable talking about: what happens to my pension when I die? You can nominate whoever you like to receive your pension on your death. You don’t have to nominate just one person - you could split your pot in whatever proportion you like.

You can also leave some, or all, of your pension to a trust or a charity of your choice. Anyone classed as your dependant, or other people you’ve nominated, will usually have a choice whether to take their share as a lump sum or leave it in a pension. A dependant is defined in pension tax rules. It is your spouse or civil partner plus any children you have who are aged under 23. It can also include anyone financially dependent on you, or older children who might be dependent due to a physical or mental impairment.

A nominee is simply anyone you have nominated, including those who are not dependant on you. Although a scheme administrator often has discretion over how pensions like SIPPs are passed on, it's rare that nominations aren't followed. Usually, this only happens if there's been a change of circumstances - for example, you have gone through a divorce or remarriage, and your wishes haven't been updated. Because of this, it’s really important to regularly check that your wishes are up to date across your pension providers.

At AJ Bell, you can do this by logging into your online account and navigating to the ‘update my details’ section. Whilst you can nominate who gets what, individual beneficiaries can usually choose how to take their share of the money – that could be as a lump sum right away, or they could move it to a pension in their own name and take an income. They might choose a combination of the two. If they choose an income option, the pot they inherit will be separate to their own pension savings. This means they can take income from the inherited funds at any age or leave the money invested.

If you don’t keep nominations up to date, some schemes might limit the option to just a lump sum for your beneficiaries. Your beneficiaries might have to pay income tax on any pension money they receive. This will depend on your age when you die. If you die under 75, payments can usually be made to your beneficiaries tax-free. If you die aged 75 or over, beneficiaries usually pay income tax on the money, as and when they withdraw it. The exact tax rate will depend on their other income.

For trusts, the tax rate on lump sums will be 45%. Until recently, many pensions were outside Inheritance Tax (IHT). But that’s changing. The government has now confirmed plans to bring unused pensions into someone’s estate for inheritance tax from 6 April 2027. It’s important to note that most estates will not fall into inheritance tax, even after the changes come into force. Anything left to your spouse or civil partner from your pension will still be exempt from inheritance tax, and the other allowances and thresholds for inheritance tax will also still be available. Your personal representatives will be responsible for reporting and paying any tax due, like they are for other assets now.

The income tax rule we covered in the previous section are not due to change, so anyone inheriting a pension from someone who died over the age of 75 will still have to pay income tax on the money withdrawn.

Thank you for watching, I hope this short video has been useful. Whatever stage of retirement you are at – whether you are busy building up your savings or thinking about how and when you might access them - we’ve got plenty of articles and other short videos available on our website that can help.