Pension Death Benefits: Planning for What Happens When You Die

For most of the past two decades, defined contribution pension funds have enjoyed a uniquely privileged position in UK inheritance tax planning. Pension pots sit outside your estate for IHT purposes and pass to your nominated beneficiaries free of the 40% tax that would apply to assets left through your will. For many HNW individuals, building a large pension — rather than drawing it down quickly — has been an explicit estate planning strategy.

That is about to change. The Autumn Budget 2024 announced that pension funds will be drawn into the estate for IHT purposes from April 2027. The full mechanics are still being confirmed as at mid-2026, but the direction of travel is clear. Planning now — before the rules change — is essential.

The Current Position: Pensions Outside the Estate

Under the rules in force until April 2027, defined contribution pension funds (including SIPPs, personal pensions, and employer defined contribution schemes) are not counted as part of your estate for UK IHT. This is because:

1. The pension fund is legally held by trustees, not by you personally.
2. The trustees have discretion over who receives the death benefits — your nominated beneficiary is a guide, not a legally binding instruction.

On death, the pension trustees typically follow your "expression of wishes" or "nomination form," paying the death benefits to the person or persons you have nominated. Because the trustees make the decision (not your will), the pension is outside the probate process and, currently, outside the IHT calculation.

The death benefit options available to the nominated beneficiary (where the pension holder dies under age 75) include:

• Taking the fund as a lump sum — free of income tax if death is before age 75 (currently)
• Keeping the fund in a pension wrapper (inheriting it into their own "inherited drawdown") — no income tax until they draw it

On death at or after age 75:

• Lump sums are subject to income tax at the recipient's marginal rate
• Inherited drawdown payments are taxed as income as they are drawn

The age 75 threshold and income tax treatment remain under the post-2027 regime, but IHT will be added on top for many estates.

What Changes in April 2027

From April 2027, the government has announced that unused pension funds and lump-sum death benefits will be included in the deceased's estate for IHT purposes. The precise implementation mechanics — including how the IHT interacts with any income tax charge on the pension, who pays the IHT, and what elections will be available — are subject to consultation and ongoing clarification from HMRC.

As at mid-2026, the broad expectation is:

• The value of the pension fund at death will be added to the estate for IHT calculation purposes.
• IHT of 40% (reduced by any unused nil-rate band, residence nil-rate band, and spousal exemption) will apply to the pension.
• The combined effect of IHT and income tax on pension death benefits (particularly for deaths after age 75, where both apply) could mean effective rates of 60%+ on pension funds passed to non-spousal beneficiaries in large estates.
• Pension scheme trustees will be responsible for paying the IHT due from pension assets, adding administrative complexity.

Spousal transfers remain exempt from IHT — a pension passing to a spouse or civil partner will not trigger IHT. Children and other beneficiaries are affected.

The Critical Importance of Nomination Forms

Whether before or after April 2027, the nomination (or expression of wishes) form is the single most important document for pension death benefits.

Key rules:

• The form directs the trustees on who you would like to receive the pension. Trustees are not legally bound but in practice follow the nomination in almost all cases.
• The nomination is not governed by your will. Even if your will directs all assets to one person, the pension can go to someone entirely different — whoever is on the nomination form.
• Nomination forms must be regularly updated to remain relevant. An old form may name an ex-spouse, a deceased parent, or omit children born after the form was completed.

Review your nomination form after:

• Marriage or civil partnership
• Divorce or separation
• Birth of a child or grandchild
• Death of a nominated beneficiary
• Any significant change in your wishes

Discretionary vs. binding nomination: Most UK pension schemes use discretionary nomination (the trustees consider your wishes but are not bound). Some overseas schemes offer binding nominations, where the nominated beneficiary has a legal entitlement. In the context of IHT planning, the discretionary nature of the UK nomination has historically been part of what kept pensions outside the estate.

Planning Actions to Consider Now (Before April 2027)

The rule change means that pension funds above your nil-rate band (currently £325,000 per person, or up to £1m when spousal and residence nil-rate bands are taken into account) will be subject to IHT from April 2027. Several planning responses are worth considering:

Accelerate pension withdrawals selectively. If your pension exceeds what you are likely to need and the excess will simply be passed on, consider whether drawing down the pension and placing the withdrawn funds into other estate planning structures — a trust, a policy of life assurance written in trust, or simply spending it — might reduce the overall tax take. Withdrawals are subject to income tax, but for basic or lower-rate taxpayers, the income tax rate on withdrawals may be lower than the combined IHT+income tax on death.

Consider pension drawdown and reinvestment into ISAs. Funds drawn from a pension and invested into an ISA grow free of tax, and currently ISA assets are not IHT-exempt either (though this may change — the government has ISA reform under active consideration). The key comparison is the income tax on withdrawal now vs. IHT+income tax on death under the new rules.

Review life assurance. A whole of life policy written in trust can provide liquidity to pay the IHT that will arise on your pension and other assets — outside your estate if held in trust, and paid promptly to your beneficiaries or the pension trustees to cover the tax bill. This is a common approach to funding IHT.

Take spousal planning seriously. For married couples, pension assets can pass to the surviving spouse free of IHT regardless of the rule change. Ensuring pension nominations name the surviving spouse first — with children as contingent beneficiaries — means the IHT is deferred to the survivor's death.

Do not make hasty moves. The mechanics of the April 2027 rule are still being finalised. Some planning actions taken today may become less necessary — or create unintended consequences — once the detailed rules are clear. Work with a pension specialist rather than acting unilaterally.

QROPS (Qualifying Recognised Overseas Pension Schemes) and Death Benefits

For UK pension holders who have transferred to a QROPS — typically to avoid UK income tax in retirement and enjoy benefits in a lower-tax jurisdiction — the death benefit position is more complex:

• QROPS sit outside the UK pension system, so the April 2027 changes may not apply in the same way. This is an area of ongoing uncertainty.
• The jurisdiction of the QROPS matters significantly: some jurisdictions offer very generous death benefit treatment (lump sums free of tax); others are less favourable.
• The 25% Overseas Transfer Charge (OTC) applies to most QROPS transfers. Since 30 October 2024, the EEA/Gibraltar exemption was abolished; the only remaining exemption from the OTC is where the member is resident in the same country as the QROPS. This significantly reduces the attractiveness of QROPS for individuals not resident in the scheme's jurisdiction.
• The age of the member at death, the type of QROPS, and the recipient's own tax position all affect the outcome.

QROPS death benefit planning is specialist territory. If you hold a QROPS or are considering one, take advice from a specialist in international pension transfers who is familiar with the jurisdiction involved.

How Global Investments Can Help

Pension death benefit planning — both before and after the April 2027 rule changes — is one of the most material financial planning decisions for HNW individuals. Global Investments works with pension specialist advisers to help clients understand how their pension fits into their overall estate, model the impact of the new IHT rules on their beneficiaries, and identify appropriate planning responses. We also advise on QROPS in the context of international estate planning. Get in touch to discuss your pension death benefit position in confidence.

This article is for general information only and does not constitute financial, tax, or pension advice. The April 2027 pension IHT rules are still being finalised as at mid-2026 — readers should take professional advice once the detailed rules are confirmed. Tax rules are complex and change frequently. Pension values can fall as well as rise.