UK Pension Death Benefits for Non-Residents

The rules around UK pension death benefits have changed substantially over the past decade — and are set to change again significantly from April 2027 with legislated inheritance tax reforms. For UK nationals living abroad, with pension pots in UK schemes and potentially non-resident beneficiaries in multiple countries, understanding how these benefits work and how to structure them is important both for estate planning and for the beneficiaries who may receive them.

This guide covers the current position, the 2027 IHT changes, and practical steps to manage your pension nominations effectively as a non-resident.

How DC Pension Death Benefits Work

Defined contribution pensions — including SIPPs, group personal pensions, and most workplace DC schemes — hold a pot of money. When the pension holder dies, this pot is distributed according to a combination of the scheme's trust structure and the pension holder's expression of wishes.

The trust structure: UK registered pensions are typically held in trust. This is the primary reason they have, until now, generally fallen outside the pension holder's estate for inheritance tax purposes — the assets belong to the trust, not the individual. The trustees have discretion over how to distribute the benefits, though in practice they follow the member's nomination in almost all cases.

Expression of wishes: You nominate your preferred beneficiaries using a nomination form (also called an expression of wishes) with your pension provider or scheme trustees. This can be updated at any time and should be reviewed regularly.

Who can be nominated: Unlike a will, which is limited to legal heirs and named individuals in specific ways, a pension nomination can be to virtually anyone — a spouse, children (including adult children), other family members, friends, charities, or any combination. You can specify percentages.

Crystallised vs uncrystallised funds: Whether the pension was in drawdown (crystallised) or not (uncrystallised) at death affects some aspects of the distribution, but the fundamental nomination process is similar.

Types of Death Benefit Available

Lump sum: The pension pot (or the remaining drawdown fund) is paid out as a single lump sum to the nominated beneficiary or beneficiaries. Currently (and subject to the 2027 changes), if the member died before age 75, this is paid free of income tax. If the member was 75 or over, the lump sum is subject to income tax at the recipient's marginal rate.

Nominee drawdown: A nominated beneficiary can instead inherit the drawdown fund and draw income from it over their own lifetime, rather than taking it as a single lump sum. This is known as nominee flexi-access drawdown. The fund continues to be invested and grows (or falls) accordingly. Nominee drawdown keeps the funds in a pension environment, which may have tax advantages compared to taking them as a lump sum.

Successor drawdown: When a nominee who has been drawing from an inherited drawdown fund dies, they can nominate a successor to receive the remaining funds. This creates a multi-generational pension cascade. The tax treatment at each stage reflects the age of the deceased at the relevant time.

Dependant's pension (from DB schemes): DB schemes typically pay a dependant's pension to a surviving spouse or civil partner — usually 50–67% of the member's pension. Some schemes also pay a children's pension for minor children. This income is taxable as pension income.

Death Before vs After Age 75

The age of the pension holder at death has a significant impact on the current tax treatment:

Died before age 75: Death benefits (lump sums or drawdown income) are currently paid free of income tax, regardless of the size of the fund (subject to the Lump Sum and Death Benefit Allowance of £1,073,100 — see below).

Died at 75 or over: Death benefits are taxable at the beneficiary's marginal rate of income tax. For a non-resident beneficiary, the treaty position may affect whether UK tax is withheld or the home country has exclusive taxing rights.

The Lump Sum and Death Benefit Allowance

Since the abolition of the Lifetime Allowance in April 2024, there is now a Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100. This caps the amount that can be paid as a tax-free lump sum death benefit across all pension schemes. Lump sum death benefits above this threshold (on death before 75) are subject to income tax at the recipient's marginal rate where paid to an individual; the flat 45% special lump sum death benefit charge applies only where the benefit is paid to a non-individual such as a trust.

This threshold applies to lump sums paid on death before age 75. Death benefits paid after 75 are fully taxable regardless.

The 2027 IHT Changes: What Is Happening

The 2024 Autumn Budget announced, and the Finance Act 2026 (Royal Assent 18 March 2026) then legislated, that from 6 April 2027 most unused pension funds (and certain other pension death benefits) will be brought within the scope of inheritance tax. Under the current system, pensions are generally outside the estate for IHT purposes. From 6 April 2027 a pension pot passed on death could be subject to 40% IHT (above the nil rate band, including any unused spousal exemption and residence nil rate band).

Important points:

• Liability to report and pay the IHT rests with the personal representatives of the estate, with new supporting duties on scheme administrators and a Pensions Direct Payment Scheme through which the IHT attributable to the pension can be settled from the fund.
• Income tax on death benefits (where death occurs after 75) and IHT can both bite on the same fund, so the combined effective rate on some inherited pensions can be high — a point of ongoing concern.
• The position for non-UK domiciled individuals and overseas pension schemes (QROPS) can differ from that for UK-domiciled pension holders.
• Operational HMRC guidance continues to develop ahead of the April 2027 start.

The change has prompted significant review activity among pension holders — particularly those with large unused pension pots that they intended to pass to family. Professional advice should be sought in advance of April 2027 to understand the impact on your specific position.

Non-Resident Beneficiaries: Tax Considerations

When a UK pension is paid as a death benefit to a non-resident beneficiary, the tax position is complex:

Current income tax on lump sums (death after 75): The UK may withhold income tax from the lump sum at source. Whether the beneficiary's country of residence can provide credit, and whether treaty relief is available, depends on the specific treaty and the type of payment.

PAYE on drawdown income inherited by a non-resident: If a non-resident beneficiary inherits a drawdown fund and draws income from it, the income will be subject to UK PAYE unless a treaty NT code applies.

Non-UK domicile: For beneficiaries who are neither UK resident nor UK domiciled, the IHT position under current rules is largely favourable — pensions outside the estate means no UK IHT exposure. This changes from 6 April 2027, when the reforms take effect.

Structuring Your Nominations as a Non-Resident

Keep nominations current: Review your expression of wishes every time your personal circumstances change — marriage, divorce, birth of children or grandchildren, death of a previously nominated beneficiary. Outdated nominations can cause significant complications.

Consider nominee drawdown as an alternative to lump sum: For large pots, particularly where beneficiaries may be subject to high marginal tax rates, the ability to draw down gradually from an inherited fund rather than take a single taxable lump sum can be advantageous.

Name backup beneficiaries: If your primary nominee predeceases you or disclaim the benefit, having a backup (secondary) nominee named avoids the trustees having to exercise pure discretion.

Consider the interaction with other estate assets: A pension pot that falls outside the estate but is ultimately paid to the same beneficiaries as the estate may still need to be factored into overall IHT planning — particularly from April 2027 when the reforms take effect.

Non-UK pension alternatives: For large pots and those permanently emigrated, a QROPS in a jurisdiction with more favourable death benefit rules may be worth considering as part of estate planning. However, the Overseas Transfer Charge risk must be weighed carefully.

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This guide is for general information only and does not constitute financial, tax, legal, or estate planning advice. The 2027 IHT changes are legislated in the Finance Act 2026, with operational HMRC guidance still developing. Rules on pension death benefits are subject to change and individual circumstances vary greatly. Seek regulated professional advice before making any decisions.

How Global Investments Can Help

Global Investments helps UK nationals abroad review and structure their pension nominations and death benefit planning. We can help you understand the current rules, assess the potential impact of the 2027 IHT changes on your estate, and review whether a QROPS or other structure might improve your situation.

If you have not reviewed your pension nominations recently — or if you have had a significant life change — now is a good time to ensure your wishes are reflected clearly.

Contact us to arrange a death benefits review with one of our specialists.