What Happens to my Pension when I Die?

10 January 2019

What Happens to my Pension when I die?


Although no one likes to think about dying, it is useful to know what will happen to your pension fund when you die.


If you have a pension that you haven’t taken income from


If you were saving in a defined contribution pension scheme through your employer, it is likely that the scheme would pay the value of your pension pot to your dependents, or to any other beneficiaries that you may have chosen however rules can vary from scheme to scheme.


For all personal pensions, if you die before the age of 75, then any pension benefits can be passed on free of tax (if the value is less than the lifetime allowance, currently £1,030,000 in the 2018/2019 tax year).  If you die on, or after, the age of 75, any benefits will be taxed at the beneficiary’s marginal rate.


If you are drawing down an income from your pension


If you die whilst you are receiving income from your drawdown pension contract, your dependants have the following three options:-


  1. If you die before age 75, any drawdown benefits can be passed on free of tax.  If you die on, or after, your 75th birthday, any benefits will be taxed at your beneficiary’s marginal rate.


  2. Your dependant/beneficiary can continue to drawdown and carry on taking an income form it, in which case they will pay tax on the income at their marginal rate.


  3. Your dependant/beneficiary can use the remaining fund to purchase an annuity, with the income taxed at their marginal rate.


However, although the revenue rules are flexible some older pensions do not work in this way as insurers won’t update their rules.  A review of your older plans might be wise!


If you have an annuity…


An annuity is a financial product that pays you an income for life, bought with money from your pension fund.  If you die while receiving income from an annuity, what happens next will depend on what type of annuity you have got.


Your Pension Annuity or Enhanced Pension Annuity will end when you die unless:-


  • You die within the first 90 days of your plan start date, in which case value protection may apply and a lump sum will be paid to your estate.  If you have a dependant on your plan, the lump sum will only be paid if you both die within this period and will be paid to the estate of the last one of you to die.


  • You die after 90 days but within your guarantee period.  Payments will continue until the end of the guarantee period, these will be paid to your estate or the dependant on the policy.


  • You have a joint or survivor annuity which will guarantee that a surviving spouse receives regular income for life (often at a lower level than you were).


  • You have chosen to continue your value protection beyond the first 90 days of your plan start date, in which case a lump sum may be payable to your estate or your dependant’s estate.


Alternatively, the unpaid guaranteed amount could be paid as a lump sum to your dependants, tax free before your 75th birthday or taxed at their marginal income tax rate from your age 75.


Inheritance Tax


The death benefit from all pensions is usually free of inheritance tax.  It does not matter whether the money is from undrawn savings or what is left in the fund after some money has been drawn down.  Lump sum payments from annuities may be taxable depending on your circumstances. 


Passing your pension on to further generations…


In April 2015, the government removed the 55% tax charge that applied on pensions passed on at death, giving individuals the freedom to pass on their unused pension benefits to any nominated beneficiary.


Most pension options allow anyone to inherit your pension – they do not have to be your spouse or civil partner.


If you have purchased an annuity, the benefit options after death will depend on the terms of the product.  In most cases the benefits cannot be passed on after the death of the beneficiary other than to a dependant or spouse.


The beneficiary of a personal pension that has not been used to purchase an annuity will have the right to choose who can inherit these funds providing they remain within a personal pension. 


The table below, taken from the HMRC Website, provides a basic overview of the tax payable by a beneficiary when inheriting a pension fund.



Your age when you die

Tax they pay


Unused cash you took from your pot



Any age


Inheritance Tax based on the size of your estate


Money still in your pot


Under 75


75 or older



Zero, if they take it within2  years

Income tax


Adjustable income



Under 75

75 or older




Income tax


Joint, guaranteed period or capital protected annuity


Under 75

75 or older



Income tax