Pension beneficiaries

When you die, your beneficiaries will be charged inheritance tax on the items in your estate such as property, money and belongings. However, pensions usually sit outside of your estate and, in most cases, won’t count towards your inheritance tax threshold when you die.

Pension beneficiary rules

When you pass away your financial assets and personal belongings go to your beneficiaries and there may be inheritance tax due on some parts of your estate. The amount of inheritance tax collected by the government will vary depending on the total value of your estate and who your beneficiaries are. The standard threshold for inheritance tax is £325,000 in the 2024/25 tax year, so if your assets aren’t worth more than this inheritance tax won’t be charged.

Pensions aren’t considered to be part of your estate. For this reason pensions are a great way of leaving money to your loved ones while ensuring they can keep as much of it as possible. Some conditions will apply depending on how old you are when you die and the type of pension you have in place. Here are some scenarios based on whether you have a defined contribution or defined benefit pension.

Defined contribution

  • If you die before age 75 and haven’t touched your pension, your beneficiaries have two years to claim your entire pot tax free.

  • If you die before age 75, and have already started accessing your pension via drawdown, it’s possible for your beneficiaries to access your pot as a tax-free lump sum or sometimes to receive regular drawdown payments tax-free.

  • If you’re older than 75 when you die, your defined contribution pension won’t be subject to inheritance tax, however your beneficiaries will have to pay income tax at their usual rate.

Defined benefit

  • If you die before age 75, and haven’t touched your pension, your beneficiaries will usually receive a tax-free lump sum. Your pension may pay out a lump sum worth two to four times your salary. Check with your scheme administrator for more details.

  • If you’re older than 75 when you die, it’s likely that your spouse, civil partner or dependant will receive a portion of your pension, however this may be subject to tax charges.

Nominating pension beneficiaries

You can nominate your pension beneficiaries with your pension provider. Beneficiaries can be anyone: a friend, a partner, a relative, even a charity. However, your provider isn’t legally obliged to accept your request, although they should take it into consideration upon learning you have passed away. Nominating beneficiaries for your pension can help ensure your loved ones inherit your money and your wishes are carried out.

Your pension isn’t usually covered by your will as it sits outside of your estate. You can mention your pension in your will if you want to eliminate any doubt over your wishes, but it’s recommended that you still contact your pension provider in order to add your beneficiaries to your policy.

You should check with your pension provider to find out what your beneficiaries might be entitled to receive when you pass away, as the rules of each scheme are different. The options available from a from a defined benefits scheme can differ to those available from a defined contribution scheme, including who may be eligible.

Managing your beneficiaries

Here are some ways to make managing your beneficiaries simple.

  1. Choose your beneficiaries. Tell your pension providers who should inherit your pension in the event of your death. This removes any ambiguity about what your wishes are and how best your pension provider can honour them.

  2. Consolidate your pensions. Having one pension pot removes the unnecessary burden of contacting multiple pension providers for your grieving loved ones. It also makes reviewing and regularly updating your beneficiaries’ details easier.

  3. Consider your pensions when you create a will. It’s not essential to have a will for your beneficiaries to receive your pension, but updating your pension nominations at the same time as drawing one up can help eliminate any doubt over your wishes.

Easily add beneficiaries with PensionBee

PensionBee customers can easily add beneficiaries by heading to the ‘Account’ section of their BeeHive. Simply fill in some details about your chosen people or charities (or a combination) who you’d like to receive a portion of your pension when you die. You can spread it across different beneficiaries and customise the proportion of your pension that goes to each, in the form of a percentage. Should you die and your beneficiaries notify us, we can begin the inheritance procedure for them.

Example: Sarah chooses to leave 45% of her pension to her daughter and another 45% to her best friend, with the remaining 10% going to Cancer Research UK. If she had a pension pot worth £100,000 this would equal £45,000 each for her daughter and friend, and a £10,000 gift to her favourite charity.

It’s important you keep your beneficiary nominations up-to-date as your personal circumstances can change over time. You can add or update your beneficiaries at any time so make sure you regularly review them, especially after major life changes such as marriage, separation or starting a family.

Should you pass away and your next of kin notify us, we’ll begin the death benefits procedure to review and agree the beneficiary(ies) of your plan and your nomination(s) will be taken into account. Before we make payment, we’ll need to verify your beneficiary(ies) identity. If your beneficiary is under 18 years old, we’ll need to verify their identity by contacting a parent or legal guardian. We’ll then arrange for the payment to be made into a bank account in their name.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 29-05-2024

Be pension confident!

Combine your old pension pots into one new online plan. It takes just a few minutes to sign up.

Get started

Mobile PensionBee analytics chart
Mobile PensionBee analytics chart
Apple Store logo Google Store logo

Have a question?Call our UK team020 3457 8444

Monday-Friday: 9:30am-5pm