Your pension is almost certainly one of your largest financial assets — yet it operates outside your will. Understanding how workplace and personal pension death benefits work is essential for ensuring the right people receive the right amount, in the most tax-efficient way.
How Pension Death Benefits Work
When you die, the pension trustees (for occupational schemes) or your pension provider (for contract-based personal pensions) are responsible for paying out any death benefits.
The key mechanism:
- You complete a nomination form (also called an expression of wishes)
- When you die, the trustees review the nomination alongside your circumstances
- They exercise discretion in paying the benefit — but they weigh your nomination heavily
- The benefit is paid to your nominated beneficiaries, typically outside your estate
Why “Outside Your Estate” Matters
Because the trustees retain discretion (rather than paying automatically to your estate), the death benefit does not form part of your estate for probate or inheritance tax purposes — at least under current rules up to April 2027.
Expression of Wishes vs Binding Nominations
| Type | Description | Enforceability |
|---|---|---|
| Expression of wishes | You indicate who you’d like to receive the benefit | Trustees consider this but are not legally bound |
| Binding nomination | Legal requirement on trustees to pay the named person | Enforceable (rare in UK; more common in personal pensions) |
| No nomination | Trustees use full discretion | More likely to end up in estate |
Most UK workplace pensions use expression of wishes rather than binding nominations. This maintains the “outside the estate” status for IHT purposes.
Always complete a nomination form, and review it every few years or after major life changes (marriage, divorce, birth of children).
What Can Be Paid as a Death Benefit?
Lump Sum (Dependants’ Lump Sum Death Benefit)
A lump sum paid from the uncrystallised (untouched) pension fund. Most personal pensions and some workplace DC schemes work this way.
Dependant’s Pension (Income)
A regular income paid to a dependant (typically spouse, civil partner, or financially dependent child). Common in defined benefit schemes.
Drawdown Continuation
For DC pensions already in drawdown, a surviving nominated beneficiary can continue the drawdown — taking income over their lifetime, or drawing down in lump sums.
Tax Rules on Death Benefits
Death Before Age 75
| Benefit type | Tax to beneficiary |
|---|---|
| Lump sum (first £1,073,100 of all pension death benefits) | Tax-free |
| Lump sum above the Lump Sum and Death Benefit Allowance | 45% tax |
| Drawdown income taken by nominee | Tax-free |
Death After Age 75
| Benefit type | Tax to beneficiary |
|---|---|
| Lump sum | Beneficiary’s marginal income tax rate |
| Drawdown income | Beneficiary’s marginal income tax rate |
The age 75 threshold is a significant dividing line. Before 75, the pension can be passed on substantially tax-free. After 75, beneficiaries pay income tax.
Inheritance Tax Changes From April 2027
Important: The government has announced that, from April 2027, unspent defined contribution pension funds will be included in the deceased’s estate for inheritance tax purposes. This represents a major change from the current position.
If the proposals go ahead as announced:
- Pension pots will be added to the deceased’s estate when calculating IHT
- The estate would pay 40% IHT on amounts above the nil-rate band (£325,000 + any unused nil-rate bands)
- Pension providers would deduct IHT before paying death benefits
- Drawdown funds already in payment would also be within scope
Planning implications: The pension-as-IHT-shelter strategy will be significantly reduced from April 2027 if these proposals are enacted in their current form. Those relying on pensions for intergenerational wealth transfer should review their plans.
Defined Benefit Pension Death Benefits
DB (final salary) pension death benefits follow the scheme rules, which typically distinguish between:
In Service (Pre-Retirement)
| Benefit | Typical value |
|---|---|
| Lump sum death in service | 2–4× annual salary |
| Dependant’s pension | 50% of projected pension |
| Children’s pension | 25% each, up to 4 children |
In Deferment (Left Employer, Not Yet Retired)
| Benefit | Typical value |
|---|---|
| Lump sum | Return of contributions + interest, or revalued deferred pension × factor |
| Dependant’s pension | 50% of deferred pension |
In Retirement (Receiving Pension)
| Benefit | Typical value |
|---|---|
| Dependant’s pension | 50–67% of member’s pension |
| Guarantee period | Some schemes pay full pension for 5–10 years regardless of death |
| Lump sum remainder | Only if guarantee period applies and member dies early in retirement |
Check your scheme’s member booklet or annual benefit statement for the exact terms.
Nomination Form: What You Should Do
- Locate all your pension schemes — workplace, old employer, SIPPs, personal pensions
- Request or download the nomination/expression of wishes form from each provider
- Name the beneficiaries — you can split percentages (e.g., 50% spouse, 25% to each child)
- Include a trustee letter — for large estates, write a letter explaining your wishes and circumstances. This guides the trustees’ discretion and will be given significant weight
- Update regularly — after marriage, divorce, death of a nominee, birth of children
Who Can Be Nominated?
Almost anyone — spouse, civil partner, unmarried partner, children (including adult children and stepchildren), parents, siblings, friends, charities. There is no restriction to “dependants” for expression of wishes on lump sums.
Multiple Pensions and the Death Process
If you have multiple pensions:
- Each provider has a separate nomination form
- Each pot is handled independently by its own trustees/provider
- Beneficiaries must contact each provider separately after death
Inform your family or executor about all the pension providers you hold pensions with — a letter in your will instructions or in a “letter of wishes” file is good practice.