Your pension is a valuable asset, accruing throughout your working life in readiness for your retirement. You might not even give it too much thought, as most of the time it’s ticking away in the background.
But as with all your financial assets, it does need a little attention to make sure it’s working in the best way for you. This includes regular reviews, especially after any major life events that could affect your retirement plans.
You also need to consider what you’d like to happen to your pension savings when you die, as this forms an important part of your estate planning.
Pensions don’t automatically pass on to your next of kin or beneficiaries in your will
Pension savings often add up to a substantial figure. However, unlike your property or other tangible assets, your pension pot may feel somewhat elusive.
Your pension may date back to when you first started work, with money deducted at source every month. You may also have more than one pension if you’ve changed jobs or shifted from employment to self-employment.
Understanding your pension is a key part of your financial planning. However, research from Aviva has revealed that 15% of UK adults with a partner do not know who will inherit their pension savings if they die before accessing them. This figure rises to 18% among people aged 79 and over.
There are also some common misconceptions about how pension savings are passed on. According to PensionsAge, 23% of people incorrectly believe that their pension will automatically go to their next of kin when they die.
Your pension also doesn’t automatically pass to beneficiaries in your will. You need to specifically nominate who you would like to receive your pension benefits.
Checking your will and expression of wish nomination is good estate planning, especially in the light of upcoming changes
Most workplace pensions are now defined contribution (DC) schemes. The retirement income paid is based on how much you and your employer contribute, along with the growth of the scheme’s investments.
You can choose to nominate a beneficiary using an expression of wish form from your pension provider. However, it’s important to note that the pension provider or trustees will make the final decision.
Your pension beneficiary could choose to take the money as a lump sum, or set up their own annuity to provide an income.
- If you’d already set up an annuity, your beneficiary will receive a proportion of this income, if you set it up on a joint-life basis.
- If you chose a single-life annuity, payments would stop.
Defined benefits (DB) pensions have different rules, which will depend on the scheme you’re in. Some may pay to your spouse, civil partner, children (under 23 if in full-time education or of any age if they are physically or mentally impaired), or to any other financial dependants.
If you have a DB scheme, checking with your provider can help you understand more about nominating a beneficiary and how they might access unused funds.
Generally, your State Pension will stop being paid when you die. However, your spouse or civil partner may be eligible to inherit some of it, depending on your level of National Insurance contributions and when you reached State Pension Age.
The rules can be quite complex, but the government’s State Pension and your partner tool can help you find out more.
Changes to Inheritance Tax rules mean unused pensions will be included in your estate
In the 2025/26 tax year, unused pensions are generally not included in an estate for Inheritance Tax (IHT) purposes. However, this is set to change from 6 April 2027, when DC pensions will fall into the scope of IHT.
The current threshold for paying IHT is £325,000, known as the “nil-rate band”. IHT is applied at 40% above this level. If you leave your property to direct descendants, such as children or grandchildren, the estate might also benefit from the “residence nil-rate band” of £175,000.
Royal London reports that including pensions in an estate will result in a further 10,500 estates becoming liable for IHT, and 38,500 paying more IHT.
This new rule will also apply to your pension if you die before reaching retirement age.
The Aviva research also discovered that 3% of people think their ex-partner may still be their beneficiary. This is why it’s essential to review your pension regularly, especially if your life circumstances have changed. If you’ve married, remarried, had children, or suffered a bereavement, you may need to update your nominated beneficiary.
Get in touch
There are a lot of variants surrounding what happens to your pension when you die. If you’d like to talk to us about your own circumstances, or any aspect of retirement or estate planning, please get in touch by emailing enquiries@gag-ltd.com or calling 0131 363 0090.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or will writing.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.