22 April 2026
Pension death benefits don’t always work in the way people expect. Who receives your pension, how they receive it, and what tax is payable can vary significantly depending on your circumstances and some important changes are also on the horizon.
How Pension Death Benefits Work Today
The tax treatment of a pension after death largely depends on one key factor: your age when you die.
If you die before age 75
In most cases, your beneficiaries can receive your pension free of income tax.
They can usually choose to:
This tax-free treatment applies if the pension provider is notified within the required timeframe and the funds are put into payment or designated properly.
If you die at age 75 or over
The rules change.
Your beneficiaries can still inherit your pension, but any withdrawals will usually be taxed as income at their own marginal rate. For some individuals, this could mean paying 40% or even 45% tax.
The Two-Year Rule (Often Overlooked)
There is an important deadline that can easily be missed.
If you die before age 75, the pension must generally be:
If this deadline is missed, the pension can lose its tax-free status, meaning beneficiaries may face an unexpected income tax bill.
It’s one of the key reasons why prompt notification to pension providers is so important after a death.
Not All Pensions Are Treated the Same
The type of pension you have also matters.
Most of the flexible rules apply to defined contribution pensions (personal pensions or workplace money purchase schemes), where the value depends on contributions and investment growth.
However, defined benefit schemes (often known as final salary pensions) work differently. These usually provide a guaranteed income, and death benefits may be taxed regardless of age at death.
Death in service benefits can also follow separate rules depending on the scheme.
Pension Lump Sum Limits
Where a lump sum is paid out on death, there is a cap on how much can be received tax-free.
This is known as the Lump Sum and Death Benefit Allowance, currently set at just over £1 million.
If total pension benefits exceed this allowance, the excess may be taxed at the beneficiary’s marginal income tax rate.
While this will only affect larger pension pots, it is increasingly relevant for individuals with long-term workplace savings and additional pension planning.
Why Your Pension Nomination Matters
One of the most common misconceptions is that pensions are dealt with in your will.
In reality, pension death benefits are usually paid at the discretion of the pension trustees. They will consider your expression of wishes (nomination form), but they are not strictly bound by it.
This makes it essential to keep your nomination form up to date, especially after major life events such as:
Out-of-date nominations can lead to delays, disputes, or unintended beneficiaries receiving your pension.
Big Changes Ahead: Inheritance Tax from April 2027
One of the most significant upcoming changes is set to take effect from 6 April 2027.
From that date, most unused pension funds will be brought into the scope of inheritance tax (IHT).
At present, pensions often sit outside your estate for IHT purposes. This has made them a highly effective estate planning tool.
That is about to change.
From April 2027, unused pension savings will generally be included when calculating whether your estate exceeds the IHT threshold.
What this could mean in practice:
It is estimated that tens of thousands of estates each year could be impacted.
Key Points of the New Rules
A few important protections and exceptions will remain:
However, there is an added complexity:
Where someone dies after age 75, beneficiaries may face both inheritance tax and income tax on pension withdrawals. This creates the potential for what is often referred to as “double taxation”.
Why This Matters for Estate Planning
These changes represent a major shift in how pensions should be considered as part of your wider estate planning.
For many people, pensions have traditionally been a tax-efficient way to pass wealth to the next generation. From 2027 onwards, that position will be less certain.
It is therefore a good time to review:
You may also want to take financial advice on how and when to draw from your pension, particularly if you are approaching retirement.
If you are thinking about what will happen to your pension when you die or want to make sure your estate planning is as tax efficient as possible, now is the right time to seek advice.
Our team regularly advises clients across Dorset, including Bournemouth, Poole, Christchurch and Highcliffe, on wills, estate planning and pension-related issues, providing clear, practical guidance tailored to individual circumstances.
Contact us today to discuss your options. Call 01202 294411 or send us an enquiry through our website: Contact Us AB Solicitors For Your Legal Needs to arrange a confidential consultation.
