Pensions and inheritance tax rules

What happens to my pension when I die?

Typically state pension payments will stop when you die. However, there may be some occasions where a spouse or civil partner will continue receiving some payments. For example, a portion of any additional state pension or protected payments, may be passed on. 

However, this will depend on when you got married and whether you reached state pension age before or after April 2016, when the new state pension replaced the basic state pension. 

You can find out more about inheriting state pension rules here. 

Who inherits my pension?

This depends on the type of pension you have.

If you have a defined contribution pension, you can nominate who inherits your pension. It is possible to nominate just one person, multiple people or a charitable organisation as beneficiaries.

However, many salary-based defined benefit pension schemes can only be inherited by your dependants (a spouse, civil partner, children under 23 or someone else who is financially dependent on you).

How do I choose who inherits my pension?

The method of nominating a beneficiary will depend on your provider. Many providers allow you to nominate your beneficiaries online by completing an ‘expression of wishes’.

Will my beneficiaries pay inheritance tax on my pension?

Typically, your beneficiaries will not pay inheritance tax on your pension.

What happens to my SIPP when I die?

If you die before your 75th birthday, your pension will be passed to your chosen beneficiaries. There is zero tax to pay on your remaining pension when taken out as income and the funds are designated within two years of your death. If it is taken as a lump sum it will be tax-free subject to your remaining Lump Sum and Death Benefit Allowance (LSDBA).

Any lump sum death benefits paid from funds that were crystallised before 6th April 2024 will not be tested against the LSDBA, since they will have already been tested against the old Lifetime Allowance (LTA). The balance over your remaining allowance will be taxed at your beneficiary’s marginal rate of income tax. Read more about Lump Sum Allowances.

If you die after turning 75, your beneficiaries will have to pay income tax on the money they inherit. 

You can leave your SIPP to a person(s) or charitable organisation(s) of your choice. They will have the option to take your remaining pension either as a lump sum or via drawdown. 

These rules also apply to most other types of defined contribution pension schemes.

What happens to my final salary pension when I die?

Unlike defined contribution pensions, a final salary defined benefit pension is not a finite pot of money. Therefore, you will not have a remaining pot of money to pass on when you die.

Depending on the terms of your pension, you may be able to leave some money for your family when you die. Many defined benefit pension schemes do have a provision for leaving money to a dependent (your spouse, civil partner or a child under 23). Some schemes may allow you to pass on money to someone else, but that money is likely to be subject to additional tax.

Read more on death benefits for defined benefit pensions.

What happens to my annuity when I die?

Your annuity might continue providing for your family when you die. Whether or not it does depends on the terms of the annuity you bought.

Single life annuities tend to offer better rates while you are alive but stop paying out after you die.

Joint life annuities will continue to pay out to your spouse after you die, but stop when they die.

Some annuities have guarantees that ensure they will continue to pay out for a fixed number of years even if you die during that time period.

It is also possible to buy a value protected annuity. When you die, this type of annuity pays out any difference between your total received annuity payments and the amount you originally bought it for.

What happens to my state pension when I die?

If you reached the state pension age (currently 66) on or after 6 April 2016, your spouse may be able to inherit half of your weekly state pension. You cannot pass on any money from your state pension to another family member or any other beneficiary.

If you reached the state pension age before 6 April 2016, your spouse may be able to inherit more than 50% of your state pension.