Pension Death Benefits Planning: Passing Wealth Tax-Efficiently

Few areas of financial planning offer as much value as the way UK pension funds handle death. Unlike most assets, pension funds currently sit outside the taxable estate for inheritance tax purposes. Handled correctly, a pension can pass to the next generation — and the generation after that — in a remarkably tax-efficient way.

But this advantage has a deadline. From 6 April 2027, pension funds will be drawn into the IHT net. This is now law — the change was legislated in the Finance Act 2026, which received Royal Assent on 18 March 2026 — though some operational detail remains to be set out in regulations. There is a planning window, and it is narrowing.

This guide explains how pension death benefits work today, what changes in 2027, and what action you should consider in the interim.

The Fundamental Tax Advantage

Under the current rules, registered pension scheme funds do not form part of the deceased member's estate for inheritance tax purposes. When you die, whatever remains in your pension is not counted when calculating whether your estate exceeds the nil rate band (£325,000) or whether IHT at 40% applies.

The tax treatment of the payment to beneficiaries depends on your age at death:

• Death before age 75: the pension fund (whether crystallised or uncrystallised) can be paid to beneficiaries entirely free of income tax, up to the Lump Sum and Death Benefit Allowance of £1,073,100. Payments above that allowance are taxed as income of the recipient. The pension is also free of IHT under current rules.
• Death after age 75: the payment to beneficiaries is taxed as their income at their marginal rate. A higher-rate taxpaying child might pay 40% on the inherited pension income. However, it remains outside the estate for IHT purposes — at least for now.

The distinction between pre-75 and post-75 death is therefore significant. A member who dies at 74 with a £500,000 uncrystallised pension delivers that money to their beneficiaries free of all tax. The same member dying at 76 could leave their children a pension fund that is taxed as income when withdrawn — though it still avoids the 40% IHT hit on the estate.

The Expression of Wishes and Nomination Form

Every pension scheme trustee or provider has the power to decide who receives the death benefit. They are not legally bound to follow any instruction — but in practice, they follow the member's nomination closely.

The nomination form (also called an expression of wishes) is not legally binding. This is actually a feature, not a flaw. Because the pension is discretionary — the trustees choose the recipient — it remains outside the estate. If it were legally directed by your will, it could be treated as part of your estate for IHT.

The practical implication is twofold. First, your will does not govern your pension. Many people assume their will covers everything. It does not. Your pension follows the nomination form or, in the absence of one, the provider's discretion. Second, the nomination must be kept current.

Life events that should trigger a nomination review:

• Marriage or civil partnership
• Divorce or separation
• Death of a named beneficiary
• Birth of children or grandchildren
• Change in the financial circumstances of a named beneficiary

If you divorced ten years ago and have not updated your pension nomination, your former spouse may still receive the fund. Providers do not automatically track life changes.

The Inherited Drawdown Option

Since the Pension Freedoms reforms in 2015, beneficiaries have had the option to receive an inherited pension in drawdown rather than as a lump sum. This is one of the most powerful features of the current death benefit rules and is frequently underused.

When a beneficiary takes the pension as inherited drawdown:

• The fund remains invested within a pension wrapper
• The beneficiary can draw income from it at whatever pace they choose
• Growth within the fund continues free of income tax and capital gains tax
• The beneficiary is taxed only on amounts actually withdrawn (at their marginal rate for post-75 deaths)
• The beneficiary can in turn nominate their own beneficiaries for the residual fund

This creates the possibility of a generational cascade. Suppose a member dies at 74, leaving an uncrystallised pension of £800,000 to a spouse. The spouse takes the pension as inherited drawdown, draws modest income over 20 years, and nominates their adult children. When the spouse dies, the remaining fund passes to the children — still in a pension wrapper, still with the option of inherited drawdown. Each generation is taxed only on what they actually withdraw, not on the total fund.

This cascade effect is the reason many financial planners now describe the pension as the most tax-efficient wealth transfer vehicle in the UK tax code — at least under current rules.

The April 2027 Change

The government announced in the October 2024 Budget that pension funds will be included in the deceased's estate for IHT purposes from 6 April 2027. This was legislated in the Finance Act 2026 (Royal Assent 18 March 2026).

Under the rules:

• The total estate, including pension funds, will be assessed for IHT
• The standard nil rate band (£325,000) and residence nil rate band (£175,000 where applicable) will continue to apply
• Where the combined estate (including pension) exceeds the available nil rate bands, the excess is taxed at 40%
• Pensions will not be grandfathered — all existing pensions are in scope, not just new contributions

This is a significant change. A person with a £500,000 estate (property, investments, ISAs) and a £600,000 pension would currently have no IHT exposure — the £600,000 pension is excluded. From April 2027, the total estate would be £1,100,000, potentially attracting 40% on amounts above the available allowances.

Under the final rules, the deceased's personal representatives are liable for reporting and paying the IHT due on the pension element, rather than the pension scheme administrator. Beneficiaries and personal representatives will need to co-ordinate so that the correct IHT is calculated and settled.

Planning Before April 2027

The narrowing window creates genuine planning opportunities. Key areas to review before April 2027:

Reassess which assets to spend first. Under the current rules, it often made sense to spend ISAs, investment accounts, and other taxable assets in retirement and preserve the pension for beneficiaries. If the pension becomes an IHT asset, the calculus shifts. Spending down the pension during your lifetime (and paying income tax on withdrawals) may be preferable to leaving it to beneficiaries who will face both income tax on withdrawals and an IHT charge on the estate.

Review estate structure holistically. The effective marginal rate on pension wealth left to non-spouse beneficiaries from April 2027 could be 40% IHT at the estate level, plus income tax when the beneficiary withdraws. The combined tax cost requires careful modelling.

Spousal exemption planning. IHT on transfers between spouses remains exempt (for those with UK domicile). A pension passing to a surviving spouse will not attract IHT at that point. The exposure arises on the second death. Spousal bypass trusts and other estate planning structures may become relevant.

Charitable legacies and pension. Charitable bequests reduce the estate value for IHT purposes. If the pension is in scope from 2027, the optimal use of charitable giving within the estate plan should be revisited.

Consider the timing of crystallisation. For those approaching age 75, the pre-75 death benefit (free of income tax) disappears. The April 2027 change removes some of the rationale for delaying crystallisation to preserve the pre-75 advantage.

Overseas Considerations

For UK expats or internationally mobile individuals, pension death benefits interact with the laws of more than one jurisdiction.

Where a UK pension is held and the member is resident abroad, the UK pension follows UK rules on death benefits. But the beneficiary receiving the pension may be taxed in their country of residence on the receipt, in addition to any UK rules that apply. The Double Taxation Agreement (DTA) between the UK and the beneficiary's country of residence governs how this is handled.

QROPS (Qualifying Recognised Overseas Pension Schemes) may offer different death benefit profiles depending on the scheme rules of the jurisdiction. Some QROPS jurisdictions are more favourable than the UK on death benefits. The Overseas Transfer Charge of 25% on moving to QROPS must be weighed against any death benefit advantage.

Compliance Note

This article is for general information only and does not constitute regulated financial advice. Pension death benefit rules, IHT planning, and the interaction with estate structures are complex matters. The April 2027 IHT change is now legislated (Finance Act 2026), though some operational detail remains to be set out in regulations. Figures cited are based on rules as at June 2026. Global Investments is an independent international advisory firm and is not itself authorised by the FCA; where UK-regulated advice is required it is provided by an FCA-authorised specialist we work with. You should seek professional advice specific to your circumstances before making any decisions.

How Global Investments Can Help

Pension death benefit planning is one of the most consequential and time-sensitive areas of financial planning for our clients. With the April 2027 IHT change approaching, our advisers are conducting structured estate reviews that incorporate pension assets alongside ISAs, property, and other investments.

Whether you need to update a nomination form, model the tax impact of the 2027 changes on your estate, or understand whether a QROPS might offer better death benefit treatment for your family, Global Investments can provide advice tailored to your circumstances. Contact us to arrange a consultation.