You spend your whole working life contributing regularly to your pension and building your pot. When you reach retirement, all this hard work pays off as you can draw from your savings to fund your lifestyle.
Hopefully, if you plan well and spend sustainably, your savings will last for the rest of your life, and you won’t have to make sacrifices because you run out of money in retirement.
This also means there might be funds left in your pension when you pass away. Like many people, you may not have considered what happens to your remaining pension funds.
It’s important that you do because there are crucial steps you must take to ensure your remaining pension funds go to the appropriate people. There are certain tax implications to consider, too.
Read on to learn more.
You need to fill out a nomination of wishes form to choose who inherits your pension
Your will is the bedrock of your estate plan as it outlines exactly what you want to happen to your estate when you’re gone and who inherits what.
What you might not realise is that your pensions aren’t covered by your will.
Instead, you normally need to fill out a separate “expression of wishes” form to choose who will inherit any remaining pension benefits. You can select a single beneficiary or split the proceeds between several people.
If you have a defined contribution (DC) pension, your beneficiaries can receive any remaining pension funds as a lump sum or as a beneficiary drawdown pension.
The rules are different for a defined benefit (DB) pension – often called a final salary pension – and it depends on the specific scheme. Some pay death benefits to surviving family members, while others do not.
As a SIPP is a type of DC pension, you can nominate beneficiaries to inherit the funds when you pass away.
If you haven’t chosen a beneficiary, your pension provider will investigate who the remaining funds need to be paid to.
Choosing a beneficiary for your pension is an important step, but research shows that it’s often overlooked.
In 2025, MoneyAge reported that 40% of over-60s hadn’t nominated a beneficiary for their pension.
If you were to pass away without nominating a beneficiary, your pension provider would decide who receives death benefits for you based on their investigation. It’s important to bear in mind that a nomination of wishes form isn’t legally binding, and your provider doesn’t have to follow the instructions, but they normally will.
In cases where there is no beneficiary, they’ll use their best judgement to decide who receives the death benefits.
This could mean that your remaining pension funds go to somebody you hadn’t intended.
The tax treatment of pensions on death is changing from April 2027 onwards
Currently, most pension funds sit outside of your estate for Inheritance Tax (IHT) purposes. This means that when the executor of your will is calculating the total value of your assets and how much IHT is due, they won’t consider your pensions.
The beneficiary of your pension might pay some Income Tax when they draw from the fund, depending on how old you were when you passed away.
- If you’re under 75 – As of 2025/26, any inherited pension funds under the Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100 are free from Income Tax. Any funds that exceed the LSDBA may be subject to Income Tax at your beneficiaries’ marginal rate. If you hold pension protection, the LSDBA may be higher than £1,073,100.
- If you’re older than 75 – Your beneficiaries will pay Income Tax at their marginal rate on withdrawals from the inherited pension.
Even if they pay some Income Tax, your pension could still be a useful tool for passing wealth to the next generation without a large IHT bill.
Unfortunately, from 6 April 2027, the rules are changing and pensions will form part of the estate for IHT purposes. This could mean that you won’t leave as much of your remaining pension funds to your beneficiaries when you pass away.
Be proactive about pensions and estate planning by nominating your beneficiaries today
If you haven’t considered what happens to your pensions when you pass away, it’s important to be proactive and nominate a beneficiary sooner rather than later.
Additionally, if your circumstances change and you need to adjust your estate plan – if you get divorced or a beneficiary passes away, for example – it’s important to update your wishes accordingly.
Get in touch
If you have a SIPP with us, please get in touch to learn more about how you can choose or update your beneficiaries today.
You can email us at [email protected] or call 03303 202091 for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
The Financial Conduct Authority does not regulate estate planning or tax planning.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
