What Happens to My Pension When I Die?
Pensions are a powerful tool for providing a retirement income. Yet, what happens to your pension when you die? Can your loved ones expect to inherit anything?
In this guide, our financial planners at Castlegate explain how pensions work in estate planning and some key tax changes to be aware of in 2025. We include some ideas for using a pension to optimise a tax plan, both in the short and long term.
The State Pension
There are different types of UK pensions, and each one is treated differently upon death.
The State Pension is a retirement income provided by the government. You can claim it once you reach your State Pension age (assuming you have at least 10 years of National Insurance contributions on your record).
There is no “pot” of money involved with your State Pension. When you die, there is no lump sum (from unused funds) payable to beneficiaries. Instead, your State Pension will normally stop being paid.
However, in certain cases, spouses or civil partners may be able to claim:
- Part of your State Pension if you reached State Pension age before April 6, 2016.
- Or receive some bereavement benefits under the new State Pension rules if you reached State Pension age after that date.
Defined Contribution (DC) Pensions
These are colloquially called pension “pots”, and they can be offered by a personal pension provider or a workplace scheme.
Here, you build up a pot of money over time by making contributions. In 2025-26, the UK’s auto enrolment rules require your employer to contribute at least 3% of your salary to your workplace scheme (assuming you are opted in). You – the employee – must also contribute at least 5%.
When you die, any unused pension funds from your scheme(s) can be left to beneficiaries. In 2025-26, pension pots currently fall outside the value of your estate. As such, they can be left to beneficiaries free from inheritance tax (IHT).
However, the rules are changing here. In April 2027, the UK government is expected to bring pension pots into the value of a person’s estate. This could have a big impact on wealthier individuals who previously hoped to pass down their pensions to their loved ones tax-free.
Defined Benefit Pensions
These are sometimes called final salary pensions. Similar to the State Pension, this pension pays an indefinite retirement income (often rising each year – e.g. to follow an inflation measure, like the Consumer Price Index).
One key difference is that a defined benefit (DB) pension is paid by a former employer rather than directly from the UK government. Common examples include the UK police pension scheme and the Teachers Pension Scheme (TPS).
DB pensions typically do not pass the full value of the pension to heirs. Instead, they might offer:
A reduced pension income to a surviving spouse or dependent (often 50%-66% of your pension).
Possibly a lump sum death benefit, particularly if death occurs before retirement or within a certain period (e.g. within 5 years of retirement).
Benefits and eligibility will depend on the scheme rules.
Annuities
An annuity is not technically a type of pension. Rather, it is a financial product that you can buy using some (or all) of your pension funds once you reach the Normal Minimum Pension Age (NMPA – i.e. 55 in 2025).
In essence, an annuity converts your pension pot into a guaranteed regular income for life (or a fixed term). Once set up, it’s generally irrevocable. What happens at death depends on the options you chose at purchase.
For instance, a single life annuity pays income only for your lifetime. When you die, payments stop, and no money is returned to your estate. However, a joint life annuity continues to pay your spouse/partner (or another named beneficiary) a portion of your income after your death.
Planning Your Pension
Until recently, defined contribution (DC) pensions were widely favoured as a tool for retirement and estate planning. Not only could they be used to build wealth tax-efficiently over a career, but they also allowed an individual to pass down unused pension funds without IHT upon death.
However, with the rules set to change in April 2027, many individuals are forced to explore other strategies for preserving their inter-generational wealth:
- Making regular gifts out of income. These might qualify for IHT exemption if the meet certain criteria from HMRC. Speak to a financial adviser for more information.
- Using the Annual Exemption for gifts each year. In 2025-26, you can make up to £3,000 in gifts without these getting counted as part of your estate for IHT purposes.
- Explore investments that qualify for Business Relief (BR) or Agricultural Property Relief (APR). The rules are changing in April 2026, at which point 100% IHT relief will be available on qualifying assets up to a “cap” of £1m. Above this threshold, an effective rate of 20% will apply.
Invitation
If you’d like to make sure you’re taking the right steps to safeguard your financial future, please get in touch.
Please note:
Your capital is at risk. Investments can go down as well as up. Past performance is not indicative of future results. Tax treatment depends on individual circumstances and may change. This content is for information only and not investment advice. Any decision to invest is the reader’s own. Diversification is key to managing risk. Market volatility affects investment values. Inflation erodes savings. Liquidity risks may prevent quick access to funds.
