Pensions and Family Planning: Nominations, Beneficiaries, and Death Benefits

Most people spend considerable energy building a pension pot and comparatively little thinking about what happens to it when they die. The answer is not as obvious as it might seem. Pensions do not automatically pass under the terms of a will. They exist outside your estate — in the hands of pension trustees who have discretion over who receives the money. How you exercise your right to guide that discretion, and how you plan for the major tax changes arriving in April 2027, will determine whether your family receives your pension wealth efficiently or expensively.

Important: This guide provides general educational information about pension death benefits and family planning. Tax law and pension rules change frequently. Individual circumstances vary greatly. You should seek regulated financial advice from a qualified adviser authorised by the Financial Conduct Authority (FCA) before making decisions about pension nominations or estate planning. Nothing in this guide constitutes tax or legal advice.

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Why Pensions Sit Outside Your Estate

A registered pension scheme is a trust. The assets within it are legally held by the pension trustees (in a personal pension or SIPP, the scheme provider acts as trustee), not by you personally. Because the assets are not legally yours — they are held on trust for your benefit during your lifetime — they do not form part of your estate for inheritance tax (IHT) purposes in most circumstances.

This has historically made pensions one of the most tax-efficient vehicles for intergenerational wealth transfer. You enjoy tax relief on contributions, tax-free growth, and income in retirement — and on death, the remaining pot can pass to beneficiaries free of IHT (under current rules). The April 2027 changes, discussed below, will partially dismantle this final advantage.

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The Expression of Wishes (Nomination Form)

Because the pension is held by trustees, it is the trustees — not you — who decide who receives the death benefit. However, pension scheme rules almost universally provide that you can complete an "expression of wishes" (sometimes called a nomination form) to indicate to the trustees whom you would like to receive the death benefit.

This guidance is not legally binding on the trustees. That discretionary status is deliberate and essential: if the trustees were legally bound to pay a specific person, the payment would be treated as an asset belonging to your estate (because you had a legally enforceable right to direct it), which would potentially bring it within the scope of IHT.

By keeping the trustees' decision discretionary — but guided by your nomination — the death benefit remains outside the estate for IHT purposes while your wishes are still (in practice) almost always followed.

In most cases, the trustees will follow the nomination unless there is a compelling reason not to — for example, if the nominated person has predeceased you, if there is clear evidence that the nomination was made under duress, or if the nomination conflicts with an obligation the trustees are aware of.

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Keeping Your Nomination Up to Date

The nomination you made when you first joined a pension scheme may be ten, twenty, or thirty years old. In that time, your personal circumstances may have changed dramatically. Nominations do not automatically update when you:

• Get married or enter a civil partnership
• Divorce or separate
• Have children or grandchildren
• Become estranged from a previously nominated person
• Experience the death of a nominated beneficiary

A person you nominated as a beneficiary decades ago — a former partner, a sibling you are no longer in contact with, a friend who predeceased you — could receive your pension pot if you have not updated your nomination. The trustees will follow a dated nomination if it is the most recent expression of wishes on file.

The fix is straightforward: contact each pension provider and request the expression of wishes form. Complete and return an updated nomination. Ideally, review your nominations every two to three years as part of a broader financial review, and immediately after any significant life event (marriage, divorce, birth of a child, bereavement).

For international families — where assets span multiple countries and family structures can be complex — regular nomination reviews are particularly important. Some jurisdictions have forced heirship rules that could interact with a UK pension nomination in unexpected ways.

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Lump Sum Death Benefit vs Inherited Drawdown

When a pension holder dies, there are two main ways the death benefit can be paid:

1. Lump sum: The entire pension pot is paid as a cash sum to the nominated beneficiary. This is simpler and provides immediate access.

2. Inherited drawdown: The death benefit is designated to a "successor's drawdown fund" in the name of the beneficiary. The beneficiary can then draw income from this fund at their discretion, retaining investment exposure.

The choice between these two options has significant tax implications, as detailed below.

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Death Before Age 75: The Tax Treatment

If you die before reaching age 75, the death benefit from an uncrystallised pension (one you have not yet started drawing from) is generally paid free of income tax, regardless of how it is paid:

• Lump sum: Tax-free to the beneficiary.
• Inherited drawdown: Income drawn from the fund by the beneficiary is tax-free.

This "pre-75 tax-free" treatment has made pensions an extraordinarily efficient wealth transfer vehicle for those who die before the age of 75. A beneficiary receiving an inherited drawdown fund from a pre-75 death effectively holds a pool of money from which they can draw income permanently without income tax.

Important change from April 2027: First announced at the October 2024 Budget and now legislated in Finance Act 2026 (Royal Assent 18 March 2026), from 6 April 2027 unused pension funds will be brought within the scope of inheritance tax. The pre-75 income tax treatment described above is not itself abolished, but a pension passing on death will from that date potentially face an IHT charge at the estate level in addition to any income tax on withdrawals — fundamentally altering the planning landscape. See the dedicated section on the April 2027 change below.

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Death After Age 75: The Tax Treatment

If you die at or after age 75, the death benefit is taxed as income in the hands of the recipient when it is paid out:

• Lump sum: The full amount is added to the beneficiary's income in the year of receipt and taxed at their marginal rate.
• Inherited drawdown: Income drawn from the fund is taxed as the beneficiary's income each year.

The only material distinction between pre-75 and post-75 death is income tax: under 75, the inherited fund is tax-free; over 75, the inherited fund is subject to income tax when drawn. Neither category has historically been subject to IHT — though that changes in 2027.

The practical planning implication of the age-75 threshold has been that pension holders approaching 75 who are in poor health sometimes consider whether to draw down or otherwise access the pension before age 75 to pass proceeds to beneficiaries under the tax-free rules. This type of planning requires careful advice and must be consistent with the individual's own income needs.

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The April 2027 Change: Pensions and Inheritance Tax

First announced at the October 2024 Budget and now enacted in Finance Act 2026 (Royal Assent 18 March 2026), from 6 April 2027 unused pension pots will be brought within the scope of inheritance tax. This is the most significant change to pension estate planning in a generation.

Under the legislated rules:

• Unused pension pots at death will be included in the deceased's estate for IHT purposes, with personal representatives liable for the IHT on the pension element.
• IHT at 40% will apply on the portion of the estate (including the pension) above the nil-rate band and residence nil-rate band (currently £325,000 and £175,000 respectively, plus transferable allowances for married couples).
• There is a double charge risk where death is at or after age 75: the pension pot may be subject to IHT (at the estate level), and the beneficiary may then face income tax on withdrawals.

This change fundamentally alters the trade-off between holding wealth in a pension versus outside it. Previously, leaving money in a pension and dying with it unspent was highly tax-efficient — the pot passed IHT-free. From 2027, leaving large sums in a pension at death will create an IHT liability.

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Planning Responses to the April 2027 Change

Several planning approaches merit consideration in advance of the 2027 change. All require individual regulated advice:

1. Draw down excess pension funds before death. If you have more pension wealth than you need for income in retirement, consider drawing from the pension at a pace that reduces the pot over time. The income is taxable, but at potentially lower rates in retirement than during working years, and avoids the combined income tax and IHT exposure post-2027.

2. Spend pension wealth first. Rather than drawing on ISAs, investment accounts, or savings and leaving the pension intact (a common strategy pre-2027 given the IHT exemption), consider drawing on the pension first and preserving other assets — which can pass under a will, potentially using reliefs such as the residence nil-rate band.

3. Review pension nominations. Given that pensions will attract IHT from 2027, the nomination of beneficiaries with lower income tax rates (to minimise the income tax on subsequent withdrawals) becomes more relevant. A beneficiary who is a basic rate taxpayer will face a lower overall tax burden than one in the 45% bracket.

4. Consider the income protection vs IHT trade-off. A pension continues to provide income security throughout retirement — it remains a source of accessible capital if healthcare costs rise or circumstances change. The decision to draw it down aggressively to avoid IHT must be balanced against the risk of outliving other assets.

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Death-in-Service and Group Life Insurance

Many workplace schemes include a death-in-service benefit — a lump sum (typically two to four times salary) paid on death while employed. These are usually written under a discretionary trust (similarly to a pension), meaning they pass outside the estate and trustees follow an expression of wishes.

If your employer provides death-in-service, confirm who holds the expression of wishes for this arrangement. It may be separate from your pension nomination. The same updating discipline applies.

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Pensions and Blended Families

For clients with children from previous relationships, pension nominations require particular care. A nomination to a current spouse may mean that children from a previous relationship receive nothing from the pension on the member's death. Conversely, a nomination to children from a first marriage may not provide adequately for a current spouse.

Trustees have discretion to split the death benefit between multiple beneficiaries — the nomination form should reflect your actual wishes, which may involve naming multiple recipients and specifying proportions.

In complex family situations, it may be worth seeking legal advice alongside financial advice to ensure that the pension death benefit strategy is coherent with your will, any trust structures, and any legal obligations arising from divorce settlements or maintenance orders.

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Overseas Beneficiaries

If your nominated beneficiaries are resident outside the UK, additional considerations apply:

• Withholding tax: UK pension schemes may withhold UK income tax on death benefits paid to non-residents unless a double taxation agreement (DTA) provides relief. Some DTAs give the country of residence the exclusive right to tax pension income (including death benefits).
• Non-UK inheritance tax: The beneficiary's country of residence may impose its own inheritance or estate taxes on the receipt of a UK pension death benefit.
• Currency: A pension death benefit paid in sterling to a beneficiary in a country with different currency creates exchange rate exposure.

Seek advice from a dual-qualified adviser with expertise in both UK pension rules and the laws of the relevant jurisdiction.

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How Global Investments Can Help

At Global Investments, we regularly work with clients on the estate planning dimension of pension wealth — helping to ensure that pension death benefit nominations are current, coherent, and aligned with broader family financial planning objectives.

Our team can assist with reviewing existing nominations across multiple pension arrangements, modelling the impact of the April 2027 IHT changes on your pension and estate, and coordinating advice with specialist pension and estate planning solicitors. For internationally mobile clients with beneficiaries in multiple jurisdictions, we can connect you with advisers qualified in the relevant territories.

Contact us to arrange a review of your pension nominations and estate planning strategy.