Death benefits overview

When a member of a defined contribution pension dies, any funds remaining in the pension can be passed on to their beneficiaries. This is potentially a very tax-efficient way of passing money on to loved ones.

As part of our Bitesize Technical series, Senior Technical Consultant Lisa Webster looks at how the death benefit rules work.

Please note: These are the current rules for pension death benefits. Changes to the tax treatment are due to come into force from 6 April 2027.

Key insights on death benefits

Who can receive funds left in a pension following the member’s death?

Funds left in a pension on death can be passed on to virtually anyone. As well as individuals, it’s also possible for pension benefits to be paid into a trust, or to a charity.

How are death benefits taxed?

If the member dies before their 75th birthday, it’s normally possible for the beneficiaries to inherit the whole fund completely tax free – although there’s a limit if this is taken as a lump sum. Even when death occurs at or after age 75, the beneficiary would usually only pay income tax when they withdraw any funds that are left to them.

How can death benefits be taken?

The beneficiaries may have the option of keeping the funds they inherit in the tax-free pension wrapper until they need them, but only if certain conditions are met.

Does inheritance tax apply to pensions?

As long as the trustees can exercise their discretion in determining who should receive the benefits (rather than there being binding nominations in place), inheritance tax does not usually apply to pensions, and the funds are separate from the deceased’s estate. There are also rules around making pension contributions or transferring pensions whilst in ill health, which may impact whether inheritance tax applies.

More Bitesize Technical

Get stuck into ‘Death benefit nominations, explained’ – the next instalment of our pension death benefits Bitesize Technical series.