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Your pension pot can currently be passed on, free of inheritance tax, to your beneficiaries when you die. From 6 April 2027, unused pension pots and some death benefits will be included in the value of your estate for inheritance tax purposes.
Your beneficiaries will usually have a choice whether to take their share as a lump sum or leave it in a pension.
Charlene Young, Head of Technical answers a question lots of people might want to ask but few feel comfortable talking about: what happens to your pension when you pass away?
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.
How do I set my beneficiaries?
You can nominate whoever you like to receive your pension on your death. This could be your spouse or civil partner, children or grandchildren, or you could nominate someone unrelated to you. You can also leave some, or all, of your pension to a trust or a charity.
You don’t need to leave your pension to just one person; you can split your pot in whatever proportion you like, so each of your beneficiaries might receive a share.
To tell us your beneficiaries, log into your AJ Bell account and navigate to the ‘Pension beneficiaries’ section.
Are my nominations binding?
As the scheme administrator of your pension, AJ Bell has discretion over how your pension is passed on. However, it's rare that nominations aren't followed. Usually, this only happens if there's been a change of circumstances (for example, a divorce or remarriage), and your wishes haven't been updated.
How are death benefits paid?
You pension beneficiaries will normally have the choice of taking the pension fund as a lump sum, or leaving the fund invested in a pension and using it to provide an income.
This lets them keep the money invested and take income as and when they need it. Any money they leave invested will continue to benefit from being in a tax-advantaged pension wrapper.
Any money passed to a trust or charity must be paid as a lump sum.
Will there be tax to pay?
Your beneficiaries might have to pay income tax on any pension money they receive. This will depend on:
- Your age when you die.
- Whether or not the pension funds are ‘designated’ to your beneficiary within two years. (‘Designating’ funds just means transferring them into the beneficiaries’ names. They don’t have to take the money out within these two years.)
| Age | Income tax treatment |
|---|---|
| Death before age 75 | Tax free (if designated within two years) Taxable (if not designated within two years) |
| Death after age 75 | Taxable Payments to a trust will normally be taxed at 45% Payments to a charity on death over 75 won't be taxed, provided you've nominated the charity and you have no surviving dependants |
Cash lump sums for deaths under 75 are subject to your available lump sum and death benefit allowance. Anything above your lump sum and death benefit allowance paid as a cash lump sum will be taxed at the beneficiary's marginal rate.
As your AJ Bell pension is held under trust, there’s usually no inheritance tax to pay on pension death benefits.
What happens when the beneficiary dies?
If your beneficiary hasn’t withdrawn the entire pension fund, the funds can be passed on again when they die. Your beneficiary will be able to nominate successors who they want the funds to go to following their death.
The successors will then have the option of taking the funds as a lump sum or using them to provide an income. Whether or not income tax applies will depend on the age of the beneficiary who was holding the pension at their death, not on how old you were.
As an example, if you live to be 90 and leave the fund to your child, aged 60, the death benefits payable to your child would be taxed (as you lived to be over 75). If your child takes the benefits as income and some of the fund is left over at their death at age 70, then the remaining fund could be passed on to their successors tax free, as they died before age 75.
It’s possible to have unlimited successors. Meaning your pension fund could be passed on for generations if it isn’t all taken out.
Case study: Graham Smith dies at age 76 with £400,000 invested in a pension
To ensure that his wife would have enough to live on after his death, Graham Smith completed an expression of wishes. It left 85% of his pension fund to his wife Caroline, and 5% each to his grandchildren.
He has the following family:
Caroline Smith, wife, 70, basic rate taxpayer
Lucy, daughter, 46, higher rate taxpayer
Sam, son, 44, higher rate taxpayer
Adam, grandson, 17, non taxpayer
Bella, granddaughter, 15, non taxpayer
Charlie, grandson, 12, non taxpayer
Graham was over 75 when he died, so any money paid to his beneficiaries is taxable at their marginal rate.
Caroline chooses to move her share to an AJ Bell SIPP, taking an income each year. She’ll pay basic rate tax at 20% (provided she doesn’t take income that takes her above the threshold for higher rate tax).
If each grandchild does the same, they can take up to £12,570 out each year without paying any tax (as they’re non-taxpayers with no other income). They don’t need to take any income if they don’t want to.
If they start work and paying income tax in the future, they could opt to leave the money in a pension, even until their own retirement.
Upon Caroline’s later death, any remaining pension funds will be paid in line with her own nomination and her age at the time, even though they originated from Graham’s pension.
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Important information: These articles are for information purposes only and are not a personal recommendation or advice. We don't offer advice, so it's important you understand the risks. If you're not sure, please speak to a financial adviser. Tax treatment depends on your individual circumstances and rules may change. Pension rules apply.