What Happens to My Pension When I Die? UK Rules Explained

The First Thing to Know: Your Pension Is Not Covered by Your Will

When you die, your estate — house, bank accounts, investments — is distributed according to your will (or the rules of intestacy if you have no will). Your pension is different. It sits outside your estate and is controlled by the pension scheme trustees.

This has two important consequences. First, it means your pension does not automatically pass to whoever you name in your will. Second, and more usefully, it means your pension currently falls outside your estate for inheritance tax (IHT) purposes — so the 40% IHT charge that applies to estates over £325,000 (or £500,000 with the residence nil-rate band) does not currently apply to pension funds.

To direct where your pension goes, you complete an Expression of Wishes form (sometimes called a Nomination of Beneficiaries) with your pension provider. The trustees are not legally bound by it, but in practice they almost always follow it. If you have not completed one — or have not updated it since a major life event like marriage, divorce, or children — do it today. It takes five minutes.

You can name anyone as a beneficiary: a spouse, children, grandchildren, friends, or a charity. You can split the fund between multiple beneficiaries by percentage.

How Age 75 Changes the Tax Treatment

The single most important factor in UK pension death benefits is whether you die before or after age 75. The rules differ significantly.

Note that the growth within the pension itself is never taxed, regardless of your age. The age 75 rule only affects how the fund is taxed when paid out to beneficiaries — not how it grows inside the SIPP.

The practical implication: dying before 75 with unused pension funds is a highly tax-efficient outcome for your beneficiaries. A child who inherits a £200,000 SIPP pot from a parent who died before 75 receives it completely free of income tax. The same pot from a parent who died at 76 would be taxed at their child's marginal rate — potentially 20%, 40%, or even 45%.

This is why many FIRE investors pursue a strategy of spending from their ISA first in early retirement, allowing the pension to continue growing untouched — and potentially passing it on tax-efficiently if they die before 75.

The Lump Sum and Death Benefit Allowance

Since the Lifetime Allowance was abolished in April 2024, the new limit relevant to pension death benefits is the Lump Sum and Death Benefit Allowance (LSDBA) — currently £1,073,100.

This is the maximum pension death benefit that can be paid as a tax-free lump sum to your beneficiaries when you die before age 75. Any amount above the LSDBA is taxed at the beneficiary's marginal income tax rate, even if you died before 75.

For most FIRE investors, the LSDBA is not a binding constraint — you would need a very large pension pot for this to affect you. But if you are on track to accumulate well above £1 million in pension funds, and you die before 75, it is worth factoring in. After age 75, the LSDBA ceases to apply because all benefits are taxed anyway.

The LSDBA is shared between the Pension Commencement Lump Sum (the 25% tax-free cash you take during your lifetime) and any death benefit lump sums. If you took the full £268,275 tax-free lump sum during your lifetime, your remaining LSDBA for death benefits is approximately £804,825.

What Beneficiaries Can Do with an Inherited Pension

When you nominate beneficiaries and die with an unused pension fund, those beneficiaries generally have options:

• Take a lump sum — receive the whole pot in one payment. Tax treatment depends on whether you died before or after 75.
• Take it as drawdown — the pension remains invested and the beneficiary draws income from it over time. This can be very efficient for a basic-rate taxpayer inheriting from someone who died before 75, as they receive tax-free income.
• Buy an annuity — less common for inherited pensions, but available.
• Leave it invested — a beneficiary can continue to hold the inherited pension without drawing from it, letting it compound further.

Importantly, an inherited pension does not count towards the beneficiary's own annual pension contribution allowance. They can receive it on top of their own pension savings without affecting their ability to contribute.

What Happens to a Defined Benefit Pension When You Die?

DB pension death benefits work differently from DC/SIPP pensions and depend heavily on the scheme rules, as well as whether you died before or after taking your pension.

The spouse's pension from a DB scheme is valuable — it is a guaranteed, inflation-linked income for life for your surviving partner. This is one reason why transferring a DB pension to a SIPP for flexibility arguments can leave a surviving spouse significantly worse off.

The lump sum from a DB death in service benefit is typically paid from a discretionary trust, which means it also sits outside your estate for IHT purposes — provided you have completed an Expression of Wishes form with the scheme.

What Changes in April 2027?

Under rules announced in the Autumn Budget 2024, from April 2027 the government intends to bring unused pension funds and death benefits into the estate for inheritance tax purposes. Under these proposals, pension funds that you have not drawn would be added to your estate and potentially subject to 40% IHT — just like your ISA, savings accounts, and property.

This is a significant change. For years, the pension-outside-IHT rule was a cornerstone of estate planning for wealthier households — many deliberately preserved pension funds as a tax-efficient inheritance vehicle, spending ISAs first and leaving pensions untouched. The April 2027 change would remove that advantage.

The practical implications for FIRE drawdown strategy are significant and are covered in detail in a separate post on pensions and inheritance tax from 2027. In brief: the common "spend ISA first" rule of thumb becomes less clear-cut once pension funds are inside the estate, and some investors may need to revisit their drawdown sequencing strategy.

As of mid-2026, the legislation is still being finalised and consultation is ongoing. The April 2027 date is the stated target, but it may slip. Check Gov.uk for the latest updates.

Practical Steps for FIRE Investors

• Complete your Expression of Wishes today. Log into every pension you hold and make sure beneficiaries are named and up to date. Check after any major life change.
• Think about who you are nominating and their tax position. A beneficiary who is a basic-rate taxpayer will pay less tax on an inherited pension drawn as income after age 75 than a higher-rate taxpayer. If you have flexibility, naming a lower-earning beneficiary can be more efficient.
• Model both pre- and post-75 scenarios. If your FIRE plan has you retiring at 45 and drawing from ISAs and SIPPs in sequence, think about what happens to your pension fund if you die at 70 vs 78.
• Do not ignore the 2027 IHT change. If preserving pension wealth for inheritance is part of your FIRE plan, factor the potential IHT exposure into your modelling now, even if the legislation is not yet final.
• Review life assurance and death-in-service cover. If you retire early, you will lose any employer-provided death-in-service benefit. Consider whether you need a separate term assurance policy to cover your family during the years between FIRE and your State Pension age.

Frequently Asked Questions

Work Out Your Own Numbers

Use this calculator to model how your pension fund evolves over time — including what would remain at different ages:

• Pension Drawdown Calculator — see your pension balance at each age, factoring in withdrawals, growth, and when State Pension income reduces your drawdown need