UK Pension Death Benefits 2026: Expression of Wish, Lump Sums and the IHT Change Coming 2027

DC vs DB Death Benefits: The Key Difference

The death benefits you leave behind depend almost entirely on which type of pension you hold. Defined contribution (DC) pensions — including SIPPs, personal pensions, and most modern workplace pensions — hold a pot of money. The entire fund can be nominated to pass to anyone you choose, either as a lump sum or as a drawdown fund, subject to the tax rules described below.

Defined benefit (DB) pensions— final salary and career average schemes common in the public sector — do not hold a pot. Instead, they promise an income to a surviving spouse (typically 50% of your pension) and may pay a lump sum on death in service. You cannot direct a DB pension's death benefits in the same flexible way as a DC pension.

Expression of Wish Explained

An expression of wish (also called a nomination of beneficiary) is a written instruction to your pension trustees setting out who you want to receive your pension fund on death. It is the single most important pension admin task most people never complete — or complete once and forget to update.

Crucially, an expression of wish is not legally binding. Pension trustees retain discretion over the payment — this is what allows the fund to remain outside your estate for IHT purposes (at least until April 2027). In practice, trustees follow a valid, up-to-date nomination in the vast majority of cases. If there is no nomination on file, the trustee must investigate next of kin, which can delay payment by months and create disputes.

A binding nomination is available in some older or offshore pension arrangements. Unlike an expression of wish, a binding nomination forces the trustees to pay the nominated person. This certainty comes at a cost: because the payment is forced rather than discretionary, HMRC may treat it as forming part of your estate, potentially triggering IHT. Seek specialist advice before using a binding nomination.

Common mistakes on expression of wish forms: naming your "estate" rather than named individuals (which triggers probate and potentially IHT); naming an ex-spouse without updating after divorce; not splitting percentages across multiple beneficiaries; and naming a minor child without also naming a trustee to manage funds until the child is an adult.

The £1,073,100 Lump Sum and Death Benefit Allowance

The lump sum and death benefit allowance (LSDBA) is £1,073,100. This is the maximum that can be paid as a tax-free lump sum from all your registered pensions combined when you die before age 75. It replaced the old lifetime allowance framework from April 2024 and is frozen at this level.

If your total pension death benefits exceed £1,073,100 and you die before 75, the excess is taxable. The provider deducts 45% on the excess before payment. If you die aged 75 or over, the LSDBA does not apply — all payments are treated as the beneficiary's income and subject to their marginal rate of income tax, regardless of the amount.

The LSDBA is shared across all your pensions. If you have a SIPP worth £800,000 and a workplace pension worth £400,000, the combined £1,200,000 exceeds the allowance by £126,900 — and if you die before 75, tax of £57,105 (45%) would be due on that excess.

The 2-Year Rule

The 2-year rule is a deadline that catches many families by surprise. If your pension fund is not designated to a beneficiary within 2 years of the scheme administrator being notified of your death, the payment loses its tax-free status — even if you died before age 75.

Specifically: if a lump sum is paid more than 2 years after notification of death, HMRC treats it as the beneficiary's income and income tax applies at their marginal rate — regardless of your age at death. This means a 60-year-old who dies with a £300,000 DC pension, but whose family takes 3 years to sort out the paperwork, could see the entire £300,000 taxed at 20%, 40% or 45% in the beneficiary's hands rather than received tax-free.

The practical lesson: make sure your key family members or executors know which pension providers you use and can contact them promptly. Keep a list of pension providers, policy numbers, and online login details in a secure but accessible location (a sealed envelope with your will, or a password manager shared with a trusted person).

Drawdown Beneficiaries

When a DC pension holder dies, beneficiaries do not have to take the fund as a lump sum. They can instead inherit the pension as a beneficiary drawdown fund — keeping the money invested and drawing it down over time. This can be highly tax-efficient:

• If you die before 75: beneficiaries can draw from the fund entirely free of income tax (up to the LSDBA). They can delay withdrawals until they need the money, allowing continued tax-free growth.
• If you die aged 75 or over: beneficiaries pay income tax at their marginal rate on withdrawals. A beneficiary who is a basic-rate taxpayer pays 20%; a non-taxpayer can withdraw up to the personal allowance (£12,570) each year tax-free.

Beneficiary drawdown funds can be further nominated to pass to the next generation on the beneficiary's death — known as "successor drawdown". This creates a chain of inherited pension funds that can span generations, though each generation pays income tax at their own rate on withdrawals if the original holder died aged 75 or over.

Pension Bypass Trust

A pension bypass trust (or spousal bypass trust) is a discretionary trust established to receive death benefit lump sums from a pension. Rather than the lump sum going directly to a surviving spouse (and then into their estate, potentially incurring IHT on their death), it goes into the trust. The trustees — who can include the surviving spouse — control when and how money is distributed.

The main benefit: money in the bypass trust does not form part of the surviving spouse's taxable estate. If the surviving spouse is already wealthy, a large lump sum landing in their estate could push it well above the IHT threshold, costing up to 40% on death. Via a bypass trust, the same money can be used for the spouse's benefit without entering their estate.

From April 2027, DC pension funds themselves will enter the estate for IHT, reducing one of the historic advantages of pensions. Bypass trusts may still have a role in preventing double IHT (pension fund taxed on first death, then proceeds taxed again on spouse's death), but the landscape is changing. Anyone with substantial DC savings should take financial and legal advice before April 2027 to review their strategy.

The April 2027 IHT Change: What You Need to Know

Currently, DC pensions sit entirely outside your estate — they are not counted when calculating your IHT liability. This has made pensions an extremely popular wealth transfer vehicle: financially savvy retirees draw from ISAs, savings and other assets first, preserving their pension pot to pass on free of IHT.

From April 2027, unspent DC pension funds will be added to your estate for IHT. The current IHT nil-rate band is £325,000 (rising to a maximum of £1,000,000 with the residence nil-rate band and full spouse exemption). Amounts above the available threshold are taxed at 40%.

Key points on the reform:

• The spouse/civil partner exemption is expected to apply — pensions left to a spouse should remain IHT-free (as with other assets)
• Pensions left to adult children, cohabiting partners or other beneficiaries will fall within the estate and face potential 40% IHT
• The change affects the order of asset drawdown in retirement — many people will want to spend pension funds earlier and preserve other assets instead
• Annual gifting exemptions (£3,000/yr, plus use of prior year allowance) and 7-year gifts become more relevant for passing wealth to children

This reform will not affect everyone equally. If your total estate (including pension) falls below your available nil-rate band, there is no IHT to pay anyway. But for those with significant DC pots and property, the combination could produce very large IHT bills.

Defined Benefit Death Benefits

DB pension death benefits vary by scheme but typically include:

Unmarried partners are typically not automatically entitled to a DB scheme pension — you usually need to provide evidence of financial dependency or cohabitation to the scheme trustees. If you are unmarried and cohabiting, check your scheme rules carefully and ensure you have provided the scheme with up-to-date nominee information and evidence of your relationship.

Nomination Review Checklist

A nomination review should take no more than 30 minutes and could save your family tens of thousands of pounds and months of delay. Work through this checklist for every pension you hold:

• Locate all your pension providers (use a pension tracing service if needed: gov.uk/find-pension-contact-details)
• Log into each provider portal and review your current expression of wish
• Check that named beneficiaries are still living and still correct
• Ensure percentages across multiple beneficiaries add to 100%
• Remove any ex-spouse or former partner from nominations
• Add new spouse, partner or children born since last review
• Check whether any beneficiaries are minors — consider naming a trustee or trust
• Do not name your "estate" unless you specifically want the fund to go through probate
• For DB pensions, check the scheme rules on unmarried partners and ensure cohabitation evidence is on file
• Tell your executors or next of kin where each pension is held and how to contact them

Worked Example: John, Age 62