Pension Death Benefits and Estate Planning: Nominations and Trusts

Pension death benefits are among the most powerful tools in estate planning — and among the most commonly misunderstood. Until 6 April 2027 they sit outside your estate for IHT purposes, providing a mechanism for passing wealth to heirs with potentially significant tax advantages. From 6 April 2027, unused pension funds are brought within the estate for IHT (Finance Act 2026), which materially changes the planning calculus. Either way, the effectiveness depends entirely on how nominations are structured and whether they are kept up to date.

This guide explains how pension death benefits work, the tax treatment before and after age 75, the role of beneficiary drawdown, and when a trust nomination may be appropriate.

Why Pension Death Benefits Are Different

Unlike most assets you own — property, investments, bank accounts — pension savings do not pass under your will. They are not part of your estate in the legal sense and are not subject to probate. Instead, the pension trustees (or in the case of a SIPP, the scheme operator acting as trustee) have discretion over who receives the death benefits.

This discretion is the mechanism that keeps pensions outside your estate for IHT purposes. Because the pension does not legally belong to you at the point of death — you have a right to draw it, but not to dictate its absolute destination — it is not assessed as part of your estate for the 40% IHT calculation.

The practical implication: a pension pot of £500,000 can pass to your children without 40% IHT being charged on it. An equivalent ISA of £500,000 is inside your estate and fully subject to IHT above the nil-rate band.

Important caveat: unused pension funds are brought within the estate for IHT from 6 April 2027 under the Finance Act 2026 (Royal Assent 18 March 2026), with personal representatives liable for the IHT due. This is a significant change that removes the IHT exemption described above for deaths on or after that date. The pre-2027 position is set out here for completeness, but plan on the basis that pension IHT-exemption ends in April 2027 and verify the detailed rules before acting.

Expression of Wishes: Keeping It Current

The cornerstone of pension death benefit planning is the Expression of Wishes (sometimes called a nomination form or beneficiary nomination). You complete this for each pension scheme you hold, directing the trustees to pay death benefits to specified individuals or entities.

Trustees are not legally bound to follow your Expression of Wishes — their discretion is real, not nominal. In practice, however, trustees follow nominations in the vast majority of cases, unless there are compelling reasons not to (such as a vulnerable beneficiary, a court order, or a clear change in circumstances they were not informed of).

Why keeping nominations current matters: An outdated Expression of Wishes is one of the most common causes of pension death benefits going to unintended recipients. Common scenarios:

• Nominating a former spouse after divorce (the pension does not automatically update — the nomination remains until you change it).
• Failing to add a child born after the original nomination was made.
• Nominating a parent who has since died, leaving the trustee without clear guidance.
• Failing to update after a second marriage.

Action point: review your Expression of Wishes whenever your personal circumstances change — marriage, divorce, birth of a child, death of a nominated beneficiary. Even if circumstances have not changed, review it at least every few years to confirm it remains correct.

Tax Before Age 75: The Tax-Free Window

If you die before age 75, pension death benefits can be paid to nominated beneficiaries completely free of income tax, provided certain conditions are met:

• The payment is made within two years of the trustees being notified of the death (the "two-year rule" — payments made outside this window may become taxable).
• The benefits are from an uncrystallised pot or a designated drawdown fund.

This applies whether the benefit is paid as:

• A lump sum directly to a beneficiary (tax-free).
• A transfer to a beneficiary's "inherited drawdown" arrangement (tax-free on receipt; income drawn from the inherited drawdown is also tax-free while the original member died before age 75).

Dying before 75 with a meaningful pension is a significant financial event for beneficiaries. A £600,000 pension paid tax-free to adult children represents £600,000 of wealth — far more efficient than an equivalent amount in an estate paying 40% IHT on the excess above the nil-rate band.

Tax From Age 75: Still Efficient, But Taxable

If you die at age 75 or over, death benefits paid to individual beneficiaries are subject to income tax at the beneficiary's marginal rate as they draw the income. The funds are not taxed as a lump sum immediately — they can be placed in the beneficiary's inherited drawdown arrangement and drawn over many years.

The practical consequence: a beneficiary in the basic rate band (20%) draws down the inherited pension and pays 20% on it. This is still outside the estate for IHT, which in a higher-rate IHT scenario compares favourably — a 40% IHT charge on the full sum would have been the alternative.

For beneficiaries with high income already, receiving large inherited drawdown withdrawals in the same year as other income may push them into the higher rate band. A thoughtful beneficiary can manage withdrawals across years to stay in the basic rate band.

Beneficiary Drawdown: Stretching the Benefit

Rather than receiving a pension death benefit as an immediate lump sum, a beneficiary can choose "inherited drawdown" — the fund is transferred to a drawdown plan in the beneficiary's name, and they draw income from it at their own discretion.

Advantages of inherited drawdown:

• Tax efficiency: the fund remains invested and grows; the beneficiary draws only what is needed each year, potentially managing their marginal tax rate.
• Investment continuity: the assets remain in a pension wrapper, continuing to grow free of income tax and CGT.
• Flexibility: the beneficiary can vary withdrawals, take more in low-income years, and less in high-income years.

The beneficiary of an inherited drawdown fund can themselves nominate subsequent beneficiaries — creating a "cascade" or "bloodline" trust effect within the pension structure.

The Cascade Nomination Structure

A cascade (or sequential) nomination is a structured Expression of Wishes that designates beneficiaries in order:

1. Surviving spouse or civil partner (primary beneficiary)
2. Adult children (if no surviving spouse, or if spouse disclaims)
3. Grandchildren (if no surviving children)

This structure ensures the pension fund cascades down the bloodline rather than being paid out as an immediate lump sum to a single beneficiary who may then face IHT on their own estate.

If the spouse receives the pension and later dies, the remaining inherited drawdown passes to the children — again outside IHT — provided the cascade nomination is properly structured and the trustees follow it.

Note: the IHT-free cascade is not automatic. It depends on the trustees exercising their discretion in line with the nomination at each generation. For long-term planning, the cascade nomination works best in combination with clear trustee guidance and regular reviews.

Trust Nominations: When They Are Appropriate

Some practitioners recommend nominating a discretionary trust as the beneficiary of pension death benefits rather than individual beneficiaries directly. The trustees of the trust then exercise discretion about who receives the money and when.

This can be appropriate where:

• Beneficiaries include minor children who cannot legally receive large sums.
• A beneficiary has personal insolvency risk or creditor exposure — a distribution to the trust rather than directly to the individual provides some protection.
• A beneficiary receives means-tested benefits and a large pension lump sum would disqualify them.
• There is a blended family or complex family arrangement where outright distribution to one person might not be fair to others.

Important limitation: not all SIPP and pension providers will accept a trust as a beneficiary nomination. If they do, the trust must be a properly drafted discretionary trust, not simply a letter of wishes. Before setting up this arrangement, confirm with your provider that it will accept trust nominations and understand any administrative requirements.

Further complication: if the trust is named as beneficiary, it receives the pension death benefit. Depending on the age of the deceased and the trust structure, the tax treatment of payments from the trust to the individual beneficiaries may differ from direct payments. Specialist legal and tax advice is needed before implementing trust nominations.

Spousal Benefits: The First Line of Succession

The UK pension rules recognise the financial interdependence of spouses and civil partners. Death benefits paid to a surviving spouse from a DC pension (before or after age 75) are typically available as lump sum or inherited drawdown. If the original member died before 75, the spouse can receive and draw the inherited fund tax-free.

If the spouse then dies, the remaining inherited drawdown can pass to the next generation — taxable as income if the original member was 75 or over when they died, tax-free if the original member died before 75.

This "second death" situation is worth planning for: ensure the surviving spouse also has an up-to-date Expression of Wishes nominating the next generation as beneficiaries of the inherited drawdown fund.

How Global Investments Can Help

Effective pension death benefit planning requires coordination between the Expression of Wishes, the overall estate plan (will and trusts), the IHT position, and the needs and tax positions of the intended beneficiaries. Our advisers work with clients to structure nominations correctly, review and update them regularly, and consider whether trust nominations are appropriate for complex family or financial situations.

For internationally mobile clients, we also address the interaction between UK pension death benefits and overseas estate planning rules — relevant where beneficiaries are in different countries.

Contact us to review your pension nominations and estate planning. Legislated changes to pension IHT treatment (Finance Act 2026) materially affect planning from 6 April 2027, when unused pension funds fall within the estate for IHT — verify the detailed rules before acting. This guide does not constitute legal or financial advice.