UK Pension Death Benefits 2026/27: What Happens to Your Pension?

Why pension death benefits matter

Your pension is often your largest financial asset after your home. Unlike most assets, a defined contribution (DC) pension does not automatically form part of your estate for inheritance tax or probate purposes. This makes it one of the most powerful wealth transfer tools available in the UK -- but only if you understand how it works and nominate the right beneficiaries.

The rules changed significantly in 2023-24 with the abolition of the Lifetime Allowance, and another major change -- bringing pensions into the IHT regime -- is scheduled for April 2027. Understanding the current rules and the upcoming changes is essential for anyone with significant DC pension savings.

Defined contribution pensions on death

How DC pensions pass

When you die, your DC pension (a workplace or personal pension where you have a pot) does not go through your will. It passes at the discretion of the pension scheme trustees, guided by your Expression of Wishes (also called a nomination form or beneficiary form).

Because the trustees decide, the pension:

• Does not form part of your probate estate.
• Is not subject to the terms of your will.
• Currently does not form part of your IHT estate (until April 2027).

This is highly advantageous, because:

• The pension bypasses probate -- beneficiaries can receive funds faster.
• Currently, no IHT is payable regardless of the pension's value.
• Beneficiaries can receive and draw down the fund over many years, paying income tax only when they withdraw.

Nominating beneficiaries: the Expression of Wishes

The Expression of Wishes form is one of the most important documents you will complete for your pension. It tells the trustees:

• Who you would like to receive the pension death benefits.
• In what proportions.

You can nominate:

• Individuals (spouse, civil partner, children, grandchildren, friends).
• A trust.
• A charity.
• Multiple beneficiaries with different percentage splits.

Trustees are not legally bound to follow the nomination, but in practice they almost always do, unless there are competing claims or the form is out of date.

Critical: update your nomination after any major life event -- divorce, remarriage, birth of children, death of a nominee. An outdated form nominating an ex-spouse can result in funds going somewhere you did not intend.

Death before age 75

If you die before your 75th birthday, pension death benefits are treated very generously:

• Beneficiaries can take the funds as a lump sum, drawdown (flexi-access), or annuity.
• Within the Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100, lump sums are completely free of income tax.
• Drawdown funds inherited before age 75 can be drawn down free of income tax (there is no cap on drawdown death benefits before 75, though the LSDBA caps tax-free lump sums).
• If the pension was in accumulation (not yet being drawn), the full pot can pass tax-free to the nominated beneficiary.

Example: you die at age 63 with a £500,000 pension pot. Your nominated beneficiary receives the £500,000 tax-free (well within the £1,073,100 LSDBA). They can either:

• Take it as a lump sum immediately.
• Move it into a "beneficiary's drawdown" arrangement, keeping it invested and drawing it down over time -- paying no tax until they draw funds.

The Lump Sum and Death Benefit Allowance (LSDBA)

The LSDBA replaced the old Lifetime Allowance for death benefit purposes in April 2024. It is set at £1,073,100 for 2026/27.

It covers the total of:

• Tax-free lump sums paid to beneficiaries from your pension(s).
• Serious ill-health lump sums paid to you.
• Any previous Lifetime Allowance tax-free cash you took in your lifetime.

Amounts above the LSDBA are taxed as income in the beneficiary's hands.

Note: this limit is per individual deceased person, not per beneficiary. If you have multiple pension pots across multiple schemes, the LSDBA covers all of them in aggregate.

Death after age 75

If you die on or after your 75th birthday, the tax treatment changes:

• There is no income tax-free lump sum from pension funds.
• Beneficiaries can still inherit the pension into a beneficiary's drawdown account.
• But when they withdraw, they pay income tax at their marginal rate on the withdrawals.

This does not mean pensions are a bad way to pass wealth after 75 -- the pension remains invested, the beneficiary controls the timing of withdrawals, and they can spread withdrawals over many years to manage their tax rate. But it is not as clean as the pre-75 position.

Inherited pension drawdown

When a beneficiary inherits a DC pension, they can:

1. Take a lump sum -- immediately, subject to income tax if death was after 75.
2. Move into beneficiary's drawdown -- keep the fund invested under their own name, withdraw as needed. Tax is paid on withdrawals (if death after 75, or amounts above LSDBA if death before 75).
3. Buy an annuity -- exchange the pot for a guaranteed income (less common post-freedom).

Beneficiary drawdown is particularly useful because:

• The fund continues to grow tax-free.
• Withdrawals are spread over time, potentially at lower tax rates.
• On the beneficiary's death, they can pass the fund on again (successors' pension).

Defined benefit pensions on death

DB (final salary or career average) pensions work very differently. The death benefits depend on your status at the time of death:

Active member (still employed, accruing pension)

Most DB schemes pay:

• Death-in-service lump sum: typically 2 to 4 times your salary at death, paid tax-free to nominated beneficiaries. Some schemes pay a fixed multiple, some allow member choice.
• Dependant's (survivor's) pension: usually 50% of the pension you had accrued (or projected) at the date of death, paid to your surviving spouse or civil partner for their lifetime.

Note: if you have children under 18 (or in full-time education), some schemes also pay a children's allowance.

Deferred member (left employment, waiting to draw pension)

• Lump sum: usually a return of contributions with interest, or a deferred lump sum based on accrued pension.
• Dependant's pension: may be payable, but terms are often less generous than for active members. Check your scheme booklet.

Pensioner (already receiving pension)

• Dependant's pension: typically 50% of your pension, paid to your surviving spouse or civil partner for their lifetime.
• Guaranteed period: many DB schemes have a guarantee period (usually 5 years). If you die within this period, the pension continues to be paid (or a lump sum equivalent) to your estate for the remainder.
• Lump sum: usually not available once you are in payment, unless within a guarantee period.

Public sector DB pensions

Schemes such as the NHS Pension, Teachers' Pension, Local Government Pension Scheme (LGPS), Civil Service, Police and Fire pensions all have their own specific death benefit terms. These are typically among the most generous:

• LGPS: 3 x final pay lump sum (active members), 50% surviving partner's pension.
• NHS: 2 x reckonable pay (active members), survivor's pension.

Always check your specific scheme booklet.

IHT and pensions: the 2027 change

This is the most significant pension planning issue of the current decade.

Current position (up to 5 April 2027)

DC pension funds are currently outside your estate for IHT. No matter how large your pension pot, it does not attract IHT on death. This has made pensions one of the best IHT planning tools -- many advised to spend other assets first and leave pension funds for the next generation.

From 6 April 2027

The government announced in Autumn Budget 2024 that unspent DC pension funds will be brought within the IHT regime. The proposal is:

• Pension funds become part of the deceased's estate.
• Subject to the standard IHT nil-rate band (£325,000) and residence nil-rate band (£175,000).
• 40% IHT on amounts above the available threshold.
• The pension trustees would be responsible for paying IHT before releasing funds to beneficiaries.

This is a major change. A couple with a £1 million pension between them and a £500,000 house could face an IHT bill of hundreds of thousands of pounds under the new rules.

Planning actions to consider now:

• Review whether taking pension income earlier (and spending it or gifting it) is beneficial.
• Review whether other assets should be preserved inside pensions before other spending.
• Consider the interaction with the nil-rate band, spousal exemption, and RNRB.
• Seek regulated financial advice -- this is complex.

Note: DB pension death benefits (death-in-service lump sums and dependant's pensions) are not affected by the IHT change in the same way.

Practical steps to take now

1. Complete or update your Expression of Wishes for every pension you hold. Most providers offer this online.
2. Notify your pension provider if your circumstances change (marriage, divorce, children, death of a nominee).
3. Check the death benefits section of your scheme booklet -- DB pension terms vary significantly.
4. Consider consolidated pensions -- having multiple small pots is administratively complex for beneficiaries.
5. Seek regulated financial advice on pension death benefit planning, especially in light of the 2027 IHT change.

Sources

• HMRC: Pensions tax manual -- death benefits
• GOV.UK: Autumn Budget 2024 -- pensions and IHT
• HMRC: Lump Sum and Death Benefit Allowance
• The Pensions Advisory Service: Death benefits guidance