Speak directly to our team
01603 218000
Speak directly to our team
01603 218000
Home
9 mins read
Guides and advice Financial Planning

A guide to drawdown pension death benefits

Pension planning is an important part of wealth management and helps to ensure your money benefits loved ones after you pass away. In this article, we look at what happens to your drawdown pension when you die, how new inheritance tax rules will impact your pension, and what your beneficiaries can do to make the most of your financial legacy.

Updated: 01.09.26

By Neil Marsden

This content was factually correct when written but may not reflect current developments or information.

Guide to pension death benefits

What happens to a drawdown pension when you die?

Unlike an annuity, which may stop paying out upon your death, your beneficiaries can inherit your drawdown pension. Beneficiaries can be anyone you choose, for example, family, friends, or a nominated charity; funds can be accessed in one of three ways:

  • Withdrawing a lump sum

  • Keeping the money invested while drawing income as and when needed.

  • Buying an annuity.

However, there are tax implications depending on your age at death.

The crucial 'age 75' rule and Income Tax

Private pension funds may be liable to Income Tax, but this will depend on how old you are when you pass away.

If you die before age 75

If death occurs before age 75, pension benefits can often be paid tax-free, although limits may apply depending on the value of benefits previously taken and the individual's available Lump Sum and Death Benefit Allowance. The maximum tax-free withdrawal in a single lump sum is £1,073,100. Any amount over this can be treated as income and may be subject to income tax.

However, to qualify as tax-free, the lump sum death benefit must be claimed within two years from the date your pension provider was told about your death.

If you die after age 75

Your beneficiaries can still access the pension, but the tax-free element will no longer be valid, and any withdrawals will be subject to Income Tax. Beneficiaries can typically choose to access funds by:

  • Withdrawing a lump sum.

  • Withdrawing funds as and when needed (known as a ‘flexi-access drawdown’), leaving the remaining investment to grow.

  • Using it to buy an annuity.

It’s worth noting that if you have an older pension set up before April 2015, the age 75 tax rules still apply. So, while there may be a limit to how much beneficiaries can withdraw (known as ‘capped drawdown’), those funds will be subject to tax if you pass away at age 75 or older.

Are drawdown pensions exempt from Inheritance Tax (IHT)?

Currently, most pensions are exempt from Inheritance Tax, but this is due to change from 6th April 2027.

What are the IHT changes from April 2027?

If you pass away on or after 6 April 2027, any unused pension funds and death benefits will be included as part of your estate and could be subject to Inheritance Tax, depending on the total value of your estate.

If the total value of your estate is below the IHT threshold, it means there is no IHT to pay. The threshold is currently £325,000 and is fixed until April 2031. Anything over the threshold (also known as the nil-rate band) can be taxed. 

However, tax rules are complicated and depend on who you leave your assets to. For example, leaving all your assets to your spouse or civil partner is usually tax-free. If unsure, you should consult a tax specialist.

The 'two-year rule'

The two-year rule refers to the time limit on claiming unused private pension funds. If your beneficiaries claim the funds within two years (and you pass away before age 75), then they can withdraw a tax-free lump sum up to the value of £1,073,100 (the Lump Sum and Death Benefit Allowance).

How long does it take for a pension to pay out after death?

This can vary depending on how complex the estate is and how quick the executors complete the paperwork. It’s important for beneficiaries to seek financial advice at this point to avoid costly mistakes in accessing the pension.

How to ensure your children inherit your pension

Typically, your children can inherit your pension if it’s a defined contribution scheme (including a SIPP). Although at the pension trustees’ discretion, the best way to ensure your wishes are understood is to put them in writing and let your pension provider know by completing an ‘expression of wishes’.

If you don’t specify your beneficiaries, the pension trustees won’t be aware of your wishes and won’t be able to take this into account when deciding who the funds go to. With this in mind, if you have complicated family relationships, it is vital to be clear about who you want to receive your money.

What if I have an annuity or a final salary pension?

Final salary pensions are a type of defined benefit pension. These pensions will have their own rules about what happens after you pass away. Usually, qualifying spouses, civil partners, or dependents will get a percentage of what you (the pension holder) would have received. This typically only applies to dependents under a certain age.

Alternatively, some defined benefit pensions provide ‘death-in-service’ benefits. This is a payout made to your beneficiaries if you pass away while still employed by the organisation that your pension relates to.

If you have an annuity, what happens after you die will depend on the product you bought and its terms. For example, with some annuity products, payouts will automatically stop upon your death, whereas others will continue to pay to a spouse or civil partner. Also, some products offer guaranteed periods that pay for a fixed term, so if you pass away within this timeframe, the payments will continue to your beneficiary.

Pension planning and wealth management

Personal pensions are complex, even more so as IHT rules are set to change in 2027. It means that choosing the right type of pension is arguably more important than ever, particularly if you want to secure your wealth for the next generation. To help you understand your options, it’s recommended you seek professional advice from an independent financial adviser qualified in pensions advice. Anyone you choose must be authorised to give advice and should be listed on the Financial Services Register.

To talk about your pension options or to discuss retirement planning in general, speak to one of our qualified independent financial advisers by calling us on 01603 967967.

The value of investments and any income from them can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future. The value of tax benefits depends on your individual circumstances. Tax laws can change.

Need financial advice?

Whether you want to speak with one of our advisors or have a general enquiry, we're here to help.

Speak to us:  01603 967967

Related guides and insights

6 mins
Pension contributions

Guide to maximum pension contributions

What’s the maximum tax-free pension contribution, and how does it affect high earners?

11 mins
Intergenerational wealth planning

What is intergenerational wealth planning and why is it so important?

Intergenerational wealth planning helps families to pass on money in tax-efficient ways, as well as helping the different generations achieve their financial goals.

15 mins
guide to pension consolidation

Guide to pension consolidation

Thinking about pension consolidation? Learn about the benefits, risks, and how to avoid costly mistakes.

12 mins
What is cashflow modelling?

What is cashflow modelling? A guide to planning your financial future

Cashflow modelling can help you understand what your financial future might look like, from retirement income and gifting, to business exit planning and later-life care. We look at how it works and why advice matters.