What happens to what's left

For the last decade, pensions have been the best asset in Britain to die owning. Outside your estate for inheritance tax, passed on free of all tax if you died before 75, and taxed only as the beneficiary's income if you died after. Entire retirement strategies were built on preserving the pension and spending everything else.

That's ending, and the change is significant enough to reach backwards into every other decision in this topic.

Who actually decides where it goes

A common and consequential misunderstanding: your will doesn't govern your pension.

Defined contribution pensions are held under trust, and the scheme trustees decide who receives the death benefits. What guides them is your expression of wish — sometimes called a nomination form — which you complete with your provider.

The arrangement is deliberate. Because the trustees hold discretion, the pension sits outside your estate for probate, pays out quickly, and has historically sat outside inheritance tax. The price of that treatment is that your wishes aren't binding.

In practice, trustees follow a clear and current expression of wish in the overwhelming majority of cases. The problems arise when the form is decades old, names an ex-spouse, names someone who has died, or was never completed at all — at which point the trustees are left to work out your intentions from scratch, and may reach a conclusion your family didn't expect.

If you do nothing else after reading this page: check the expression of wish on every pension you hold. Most people have several pensions and have updated none of the forms since they were opened.

The tax position now

Two things determine the tax on an inherited defined contribution pension under the current rules: your age at death, and how the beneficiary takes the money.

Death before 75. Benefits can generally be taken free of income tax, whether as a lump sum or as income, provided they're designated within two years. Tax-free lump sums count against the Lump Sum and Death Benefit Allowance of £1,073,100; anything above that's taxable in the recipient's hands.

Death at 75 or after. Beneficiaries pay income tax at their own marginal rate on whatever they withdraw. This is where beneficiary drawdown earns its keep — rather than taking a lump sum that lands in a single tax year at 40% or 45%, a beneficiary can keep the money in a pension wrapper and draw it gradually, potentially over decades.

Beneficiary drawdown deserves more attention than it gets. The inherited pot stays invested and tax-free internally, the beneficiary controls the timing, and they can in turn nominate successors. A pot inherited by an adult child can be drawn in the years after they stop working, at a much lower rate than during their career. Not every provider offers it, which is itself a reason to check.

What changes in April 2027

The government has confirmed the intention to bring most unused pension funds within the scope of inheritance tax from 6 April 2027. The detailed mechanics — how the tax is calculated and collected, which death benefits are excluded, and how it interacts with the income tax position above — were still being finalised at the time of writing.

The direction of travel isn't in doubt, and the consequences are substantial.

For estates below the nil-rate bands, nothing much changes. Most estates pay no inheritance tax and will continue not to.

For estates above them, the pension moves from the best asset to leave behind to potentially the worst. An unused pot could face inheritance tax at 40% within the estate, and then income tax at the beneficiary's marginal rate on withdrawals — a combined effective rate that can be genuinely startling.

What that does to everything else

This is why Decision 5 isn't a piece of paperwork you handle at the end. It reaches back into the other four.

It inverts the withdrawal order. The old logic said preserve the pension and spend the ISA. For an estate above the nil-rate bands, the new logic often says the opposite: draw pension income earlier, spend it, or gift it away. See Which pot do you spend first?.

It strengthens the case for spending. Money you enjoy is taxed at 0%. Money left in a pension may now face two taxes in succession. The argument for underspending your way to a large legacy has weakened considerably.

It makes gifting from income more valuable. Drawing more pension income than you need and giving the surplus away regularly can be immediately exempt from inheritance tax under the normal expenditure out of income exemption. This is one of the cleanest responses available to the new rules, and it's covered properly in Giving it away.

It changes the annuity comparison. Capital used to buy an annuity has left your estate. A drawdown pot hasn't. See Annuity or drawdown?.

What to do now

Check every expression of wish. Every scheme, including old ones you haven't thought about in years. This is free, takes an afternoon, and is the single highest-value thing on this page.

Find out whether your providers offer beneficiary drawdown. If a scheme only permits a lump sum death benefit, your beneficiaries lose the ability to spread withdrawals across tax years. Consolidating into a scheme that offers it can be worth considering — though never at the cost of losing safeguarded benefits, protected tax-free cash or guaranteed annuity rates.

Think about who, not just what. Splitting benefits between beneficiaries who pay tax at different rates, or nominating adult children rather than a spouse who is already comfortable, can change the total tax paid substantially.

Don't rebuild your plan around rules that aren't yet in force. The 2027 changes are confirmed in direction and unfinished in detail. Reasonable preparation is sensible; irreversible restructuring based on draft mechanics isn't.

Get the estate looked at properly if the pension is a large part of it. This is the intersection of pensions, inheritance tax and income tax, and it's where the sums get genuinely difficult.

Where this connects

The estate side of this is covered in depth in the Inheritance and estate planning topic — in particular the four strategies hub, which sets out how spending, gifting, insuring and holding qualifying assets fit together.

This article is for general education only and isn't personal advice. The April 2027 rules weren't finalised at the time of writing, and tax treatment depends on individual circumstances — worth reviewing your position as the detail firms up.

Related in this series

• Turning pensions into income: the five decisions
• Which pot do you spend first?
• Annuity or drawdown?
• The four IHT strategies