Who will inherit your pension?

Advertisement: This is sponsored content provided by Kellands Hale

You might assume that your pension will be automatically passed to your chosen beneficiaries in your will. But actually, this may not be the case, as your pension provider or the scheme’s trustees will make that decision. Fortunately, you can influence this by simply informing your provider what you would like to happen.

Furthermore, with pensions set to be included in estates for Inheritance Tax (IHT) purposes from April 2027, you may want to carefully consider how your fund will be passed on when you die.

You can nominate beneficiaries to inherit your pension, but the provider has the final say

As described above, pension providers or scheme trustees have the final say as to who inherits your pension.

Typically, they’ll choose your spouse or civil partner, children or other dependants. Crucially, you can nominate your beneficiaries, whether that’s one individual or several, by completing a form with your provider. This is usually called an “expression of wish”, although some providers might refer to it as a “death benefit nomination”.

These documents are not legally binding, but the provider or trustees will usually consider them when deciding where your pension assets should go on your death. Where possible, they will generally seek to do so in line with your wishes.

You’ll also need to complete one of these forms with each provider you have a pension with – unlike your will, there is no single form that dictates how your pension assets are passed on.

How the provider manages your pension benefits will also vary depending on what type of pension you have.

Remember, keeping these forms up to date as your circumstances change is vital. For instance, if your family welcomes a new grandchild and you want to include them as a beneficiary, you need to update the forms with your pension provider(s) in order to ensure they aren’t left with nothing.

Defined contribution (DC) pensions

In a DC pension, the total value is calculated based on what’s put into it. This includes personal contributions, those from a third party (such as your employer), tax relief and any investment returns your pot has generated. Most pensions are now DC pensions.

On inheriting a DC pension, your beneficiaries have various options, including:

• Taking the funds as a lump sum
• Drawing a flexible income
• Setting up a guaranteed income with an annuity.

The range of choices will vary depending on whether you had already accessed your pension on your death.

Furthermore, if you die before age 75, your beneficiaries will usually inherit your pension free from Income Tax. However, if you are over 75, they will typically pay Income Tax at their marginal rate.

Defined benefit (DB) pensions

A DB pension pays a guaranteed income for the rest of your life, and includes variants such as “final salary” or “career average” schemes. The value depends on factors such as your salary and how long you worked for your employer. These days, only older or public sector schemes are DB.

Whether your loved ones will receive anything from a DB pension depends on the scheme’s rules. In cases where they do pay a dependant’s pension, this is usually paid to spouses, civil partners or unmarried partners who are financially dependent on you. It could also go to children under 23, in full-time education, or who are mentally or physically impaired.

They’ll usually receive a percentage of the pension income you were paid (or would have been paid, if you die before drawing your pension).

Rules for lump sums vary, depending on the type. Speak to your scheme administrator if you’re unsure what will be inherited and by whom.

State Pension

Your State Pension is calculated based on how many qualifying years you have on your National Insurance (NI) record. Most people now receive the new State Pension, for which you need a minimum of 10 years of qualifying contributions to receive anything, and 35 years to receive the full amount.

In general, when you pass away, your State Pension payments will stop. That said, in some circumstances, your spouse or civil partner may be able to inherit some of your State Pension, depending on how much you built up on your NI record, and when you reached State Pension Age.

It’s worth checking the Government website to see whether you or your spouse or civil partner would be eligible to inherit any State Pension when one of you dies.

It’s worth tracking down all your pensions

One other facet to consider is that you may have lost or dormant pensions that won’t be passed to your beneficiaries if you do not track them down before you pass away.

According to Pensions UK (formerly the Pensions and Lifetime Savings Association), there is £31.1 billion in unclaimed, inactive or lost pension pots, with an average value of £13,620 for pots owned by people aged between 55 and 75.

It’s worth checking whether you have any lost pensions, whether from previous employments or that you started privately, and tracking these pots down for two reasons:

• You may gain access to savings that you didn’t know you had. These could be a useful supplement to your main pension savings, and you could add them to your larger pot to give it a boost.

• If you don’t track them down and you pass away, the funds may not be distributed to the correct beneficiary, unless you already filled out an expression of wish form with the provider. Either way, it’s worth finding any lost pots and ensuring that the funds will go to your intended beneficiaries when you die.

To find missing pensions, your first port of call is the pension provider. If you can’t remember which scheme you were enrolled in, contact your former employer and ask them for these details.

If all else fails, the Government runs the free Pension Tracing Service, allowing you to input your details and find any lost pots.

Pensions may become subject to Inheritance Tax from April 2027

Finally, you may also want to think about how changing legislation around pensions and IHT could affect the way your wealth is passed on.

Previously, pensions were generally not included in the value of your estate for IHT purposes. However, in October 2024, Chancellor Rachel Reeves announced that the Government plans to change this from April 2027. This will apply to DC pensions and some elements of DB schemes.

From that point onwards, your loved ones could face a 40% IHT charge on your pension. Combined with the potential Income Tax charge if you die over 75 with a DC scheme, this could see your beneficiaries effectively face a “double tax” when inheriting your fund.

Additionally, you may have previously planned to spend taxable assets in retirement and leave your pension for your beneficiaries to inherit IHT-free. However, with this change in place, these arrangements may no longer be as tax-efficient as you require.

It remains to be seen exactly how pensions will be passed down after this change and, in the meantime, they could remain an effective tool for mitigating IHT. But, it’s worth considering this carefully and preparing now so that you don’t land your family with an unexpected bill in future.

This is where taking advice from a professional can help. A financial adviser or planner will be able to explain what changes like this mean for you, and help you ensure that your wealth is as suitably and tax-efficiently organised as possible.