How Pensions Fit into Your Estate Plan

I genuinely do not understand why nobody talks about this.

You ask someone what their biggest asset is. They say the house. Fine. Feels right. But for a growing number of people, it is not the house any more. It is the pension. Thirty years of workplace contributions, employer top-ups, compound growth sitting there quietly in the background. Especially if you have never drawn from it and the mortgage is still eating into whatever equity the property has left.

And yet. Families will sit around the kitchen table for an entire evening working out who gets the house, the rings, the savings account. The pension? Nobody brings it up. I have lost count of how many times I have seen this. The pension is just... there. Invisible. Like it does not exist.

That is where estate plans fall apart. Because pensions follow their own rules. They sit outside your Will entirely. They pass on through a process most families only discover after someone has already died. By which point, of course, it is too late to do anything about it.

So look. This guide walks through how pensions actually work after death. What you should be doing right now so yours ends up where you want it. And there is a big change landing in April 2027 that is going to catch hundreds of thousands of families completely off guard.

This is the bit that trips people up more than anything else. So let me just say it plainly.

Your pension has nothing to do with your Will.

Nothing. Your Will cannot touch it. When you die, the pension scheme trustees (or the provider, depending on the type of scheme) decide where the money goes. They hold the discretion. What your Will says is irrelevant to them.

The reason is structural. Pensions sit inside a trust. The money belongs to that trust, not to you personally. That setup historically gave pensions a massive tax advantage, which we will get to later. But the practical bit that matters right now is dead simple: you cannot use your Will to direct your pension.

Think about what that actually means for a second. You could write the most careful Will imaginable. Leave everything to your children. Spell it out in perfect detail. And the pension could still go to an ex-spouse. Because nobody updated a nomination form fifteen years ago.

The trustees would look at that old form and, in plenty of cases, just follow it. Your Will paints one picture. The nomination form paints a completely different one. Guess which one wins.

The fix is something called an expression of wish form. Probably the most important document you will ever fill in. And weirdly, most people have never heard of it. Which brings me back to my original frustration. Why is nobody talking about this stuff?

An expression of wish form. Some providers call it a nomination form or beneficiary nomination. Whatever the name, it is a letter to your pension provider saying who you want to get your pension when you die.

Technically the trustees are not bound by it. But in the real world? They follow whatever the most recent nomination says in nearly every case. The only time they tend to deviate is when there is a genuinely strong reason. Like the named person having died before you.

How it works

You write down the names. You can split it by percentages. 50% to your spouse, 25% each to your two children. Sign it. Send it back. Done.

The trustees file it. When you die, they pull out the most recent form, weigh up the circumstances (who depended on you financially, that sort of thing), and make their decision.

Why you must complete one

Without a nomination on file, the trustees are working blind. They will need to investigate your personal situation on their own. That takes time. They might hand the money to someone you would never have picked. Your family ends up dealing with extra paperwork and delays on top of everything else they are going through.

Fifteen minutes. That is all it takes to fill one in. Fifteen minutes to make sure a six-figure sum goes where you actually want it.

When to update it

After getting married. After a divorce. When a child or grandchild arrives. After someone in the family dies. If your finances shift in a big way. A form you filled in back in 2005 naming your then-partner? That is probably a completely different life from the one you are living now.

And do not forget. Every pension you hold has its own separate form. The workplace pensions from old jobs, any personal pensions, every SIPP. Check the lot. All of them.

Where to get one

Ring your pension provider and ask. Most will either post you a form or let you sort it through their online portal. Not sure who your provider is? Dig out old payslips or P60s. Or try the Pension Tracing Service, which is a free government tool that tracks down lost pensions.

What happens to your pension when you die comes down almost entirely to which type you have got. And the two main types work in completely different ways. This catches people out because they assume "pension" means one thing. It does not.

Defined benefit pensions (final salary or career average)

A defined benefit (DB) pension pays you a guaranteed income for life, calculated from your salary and years of service. Public sector workers tend to have these. Teachers, NHS staff, civil servants. Some long-serving private sector employees do as well.

When you die, a DB pension typically pays a survivor's pension to your spouse, civil partner, or in some schemes a qualifying dependant. How much varies. Often half of what you were receiving. Some schemes pay a third, others go up to two-thirds. You need to check your own scheme rules. The survivor's pension carries on for the rest of the recipient's life.

Some DB schemes also pay a lump sum if you die, particularly before retirement or within the first few years of drawing the pension. Amounts differ, so your annual statement or scheme booklet is where to look.

One thing to be clear about though. DB pensions do not let you pass on a pot of money. What gets passed on is an income stream. Once both you and your qualifying dependant have died, payments stop. There is nothing left to inherit after that. Gone.

Defined contribution pensions (money purchase)

A defined contribution (DC) pension is a pot of money. Yours. Workplace auto-enrolment pensions fall into this category, along with personal pensions and SIPPs. Whatever has been paid in, plus investment growth, minus charges. That is your fund.

When you die, the entire remaining pot can go to your beneficiaries. They will normally choose between taking it as a lump sum, moving it into drawdown where they take income over time, or buying an annuity.

Tax treatment hinges on how old you were at death. Die before 75, benefits are usually tax-free for your beneficiaries (though the April 2027 changes will alter this, and we will get to that shortly). Die at 75 or older, whatever your beneficiaries receive gets taxed as income at their marginal rate.

What if you have both?

A lot of people do. More than realise it, actually. A DB pension from an earlier career and a DC pension from a more recent job is a really common combination. Each one follows its own rules for death benefits. Each one needs its own expression of wish form. Each one needs checking.

Right. If you have got a defined contribution pension, the people who inherit it will face a decision. And it is not a small one. Taking the whole lot in one go is the obvious move. Not always the smart one though.

Lump sum

The whole pot lands at once. If you died before 75, it is currently tax-free. Die at 75 or older and the lump sum counts as income for the recipient in that tax year. Taxed at their usual rate. With a big pension, that can push them straight into the 40% or even 45% bracket.

Let me give you a real example. Margaret dies at 78 with £200,000 left in her pension. Her daughter Sarah already earns enough to be a higher-rate taxpayer. Sarah takes the lump sum. Pays 40% income tax on the whole lot. Keeps £120,000.

Now. If Sarah had drawn it out gradually over several years through drawdown instead, she could have managed the tax bill much more carefully. Kept more of it. Possibly tens of thousands more. But nobody told her that was an option. Because, again, nobody talks about this stuff until it is too late.

Drawdown (sometimes called flexi-access drawdown)

The pot stays invested. The beneficiary takes income from it whenever they want, in whatever amounts they choose. Because they control how much comes out each year, they can keep themselves in a lower tax band. The money stays in the market too, so it can keep growing. Flip side is risk, obviously. Values can fall as well as rise.

Annuity

The beneficiary uses the inherited pot to buy a guaranteed income for life. Predictable. Secure. Completely inflexible. Once you have bought it, that is it. No going back.

Which option is right?

No single answer. It comes down to the beneficiary's age, what they already earn, their tax position, whether they need the money straight away or can afford to leave it invested. This is one of those areas where proper financial advice can genuinely change the final number your family ends up with. Sometimes by a lot.

Right. This is the section that matters most. If you are reading this in 2026 or early 2027 and you take one thing away from this entire guide, make it this bit.

The current position (until April 2027)

Right now, unused defined contribution pension funds do not count as part of your estate for inheritance tax. The logic goes like this: your pension sits in a trust, the trustees decide who gets the benefits, you do not have an automatic right to pass the money on, so HMRC treats it as outside your taxable estate.

That has made pensions one of the most tax-friendly ways to pass wealth down through generations. Some people have deliberately spent their other assets first, leaving the pension untouched, knowing the whole thing would go to family without an IHT bill. Clever. Perfectly legal. Widely used.

That is about to change.

What changes from April 2027

In the Autumn Budget 2024, the government announced that from 6 April 2027, unused DC pension funds and death benefits will fall within the scope of inheritance tax. When you die, whatever is left in your pension gets added to the rest of your estate for the IHT calculation.

IHT is charged at 40% on anything above the nil-rate band. That band currently sits at £325,000 per person. A married couple or civil partnership can transfer unused allowances between them, giving up to £650,000 combined. The residence nil-rate band adds another £175,000 per person (£350,000 for a couple) when a qualifying home passes to direct descendants.

A worked example

David dies in 2028. He leaves a house worth £400,000, savings of £50,000, and an untouched pension pot of £300,000.

Under today's rules his taxable estate would be £450,000 (the house plus savings). Knock off the nil-rate band of £325,000 and the taxable slice is £125,000. IHT bill: £50,000.

Under the new rules, the pension gets added in. That is 450,000 plus 300,000, totalling £750,000. After the 325,000 pound nil-rate band, the taxable amount is £425,000. IHT bill: £170,000.

That extra £120,000 of tax. All of it from the pension being brought into scope. And David is not some wealthy outlier. That is a fairly ordinary estate in large parts of England.

If David was married and his wife died first, he may have inherited her nil-rate band and residence nil-rate band, pushing his allowances up. Every family's sums look different. But the direction of travel is obvious: a lot of estates that used to sit safely under the IHT threshold are going to end up above it.

What this means in practice

If your estate plan was built on the assumption that your pension would stay free of IHT? That plan is broken. Not slightly out of date. Broken. Families need to take a fresh look with the new rules factored in. Those with bigger pension pots might want to think about whether drawing from the pension during their lifetime and spending or gifting the proceeds makes more sense than leaving everything untouched.

Tricky territory though. We would strongly suggest getting advice from an independent financial adviser before doing anything about pension withdrawals or rearranging your estate plan in response. Do not just start pulling money out of your pension because you read something online.

The state pension plays by different rules from workplace and private pensions. You do not get to pick who receives it. And it does not form part of your estate.

If you were receiving the state pension

Payments stop when you die. If there is any money owed up to the date of death (arrears, basically), that goes into your estate and gets distributed under your Will or the intestacy rules if there is no Will.

Can a surviving spouse or civil partner inherit any of it?

Under the new state pension (for people who reached state pension age on or after 6 April 2016), the short answer is: a bit, possibly. A surviving spouse or civil partner might be able to inherit a portion of your "protected payment." That is the amount you were receiving above the full new state pension rate, if you had one. It only kicks in where the person who died had qualifying National Insurance contributions from before 2016.

If your spouse or civil partner has already reached state pension age themselves, they might get an increase based on your NI record. But it is limited to that protected payment element.

Under the old state pension system (basic plus additional state pension, SERPS, S2P), the rules were more generous. A surviving spouse could inherit up to half of any additional state pension or SERPS entitlement. Exact amount depended on when the person who died had reached pension age.

Unmarried partners

This one is rough. An unmarried partner gets nothing from the state pension. Does not matter if you lived together for thirty years. Raised children together. Shared everything. Nothing.

This is one of quite a few areas where cohabiting couples have far fewer rights than married couples or civil partners. It is not fair, in my view, but it is the law as it stands.

Bereavement support payment

A surviving spouse or civil partner who has not yet reached state pension age might qualify for a bereavement support payment. That is a lump sum of up to £3,500, followed by monthly payments of up to £350 for up to 18 months. Separate from the state pension entirely. You claim it through the DWP.

Pensions and Wills run on separate tracks. Your job is making sure they are pointed at the same destination. Because when they are not, the fallout is ugly.

Common problems

Your Will splits everything equally between your three children. But the pension nomination, untouched for ten years, still names only your eldest. So your eldest gets a third of the estate through the Will plus the entire pension on top. The other two end up with far less than you ever intended. And they know it. That is how families fracture.

Or this one. You get divorced and write a new Will cutting out your ex. Smart. But the pension nomination? Still has their name on it. The trustees might well follow that nomination and pay your ex-spouse. Especially if they were still listed as a dependant under the scheme rules.

I hear about situations like these all the time. They are entirely preventable. Every single one.

How to get this right

Treat your Will and your pension nominations as two halves of the same plan. Every time you write or update your Will, check your pension nominations at the same time. Every time something shifts in your life (new relationship, a death in the family, a child turning eighteen), go through both.

If your estate looks like it could be caught by the April 2027 IHT changes, getting these two things lined up matters even more. You will need to think about the balance between what passes through the Will (subject to IHT) and what comes through the pension (which will also attract IHT from 2027 onwards).

Also worth writing a letter of wishes to sit alongside your Will. Not legally binding, but it gives your family and the pension trustees useful context for the decisions you have made. Think of it as the "here is why I did what I did" document.

None of this needs to take more than an afternoon. Seriously. An afternoon. Here is what actually moves the needle.

1. Find every pension you have got

People lose track of pensions from old jobs constantly. That three-year stint in your twenties? There is probably a pension sitting there from it. The government runs a free Pension Tracing Service at gov.uk that can help you dig them up. Pull out any annual statements you have kept and put together a list. Every pension, who provides it, roughly how much is in it.

2. Check your expression of wish forms

For each pension on your list, get in touch with the provider and ask whether they have got a current expression of wish form from you. If there is not one, or if the one they have is years out of date, fill in a new one. This is the single most useful thing most people can do for their estate plan. Fifteen minutes per provider. That is it.

3. Learn your scheme rules

Every pension scheme has its own rules about what happens on death. Get hold of the scheme booklet or guide. Usually sitting on the provider's website somewhere. Work out what happens if you die before retirement versus after. Find out whether a lump sum or a continuing income gets paid out. Check who counts as a dependant under your particular scheme.

4. Look at your Will

Does your Will actually match up with your pension nominations? If they are telling different stories, one of them needs changing. And if you do not have a Will at all, sorting that out should be top of the list before anything else. Before the pension forms. Before everything.

5. Think about the April 2027 IHT changes

If your total estate with pensions included is likely to cross the available nil-rate bands, talk to a financial adviser about what the new rules mean for you. Do not rush into withdrawing pension money without proper guidance. Withdrawals during your lifetime have their own tax consequences. Get those weighed up properly before acting.

6. Tell your family

Let the people closest to you know where your pensions are, who the providers are, and where you keep the paperwork. Trying to track down multiple pensions across different providers after a death is exhausting. Slow. Demoralising. A straightforward list kept with your Will takes that entire burden away from them. It is such a small thing to do. Please just do it.

Some of this you can handle yourself. Filling in nomination forms, checking scheme rules, making sure your Will and nominations match up. Straightforward enough.

But other bits? You really do need a professional.

Talk to an independent financial adviser (IFA) if your total estate, pensions included, looks like it will breach the IHT nil-rate band once the April 2027 changes land. Or if you have got a defined benefit pension and you are wondering about transferring it to a defined contribution scheme. That is actually a regulated decision requiring formal advice for pots above £30,000. You cannot do it without an adviser. The law will not let you.

Maybe you want someone to run the numbers on whether spending down your pension during retirement works out better, tax-wise, than leaving it for your beneficiaries. Or your pensions are scattered across four or five providers and you want to consolidate them. Your family setup might be complicated. Blended families, dependants with care needs, beneficiaries living overseas. Or retirement is getting close and you need to figure out how to actually access your pension in the first place.

An IFA is regulated by the Financial Conduct Authority and has to act in your best interests. The "independent" bit means they can recommend from the whole market, not just one company's products. You can find one through Unbiased (unbiased.co.uk), which is a free matching service.

Expect to pay somewhere between 500 and £2,000 for a full review. Depends on how involved your situation is. Set against the possible tax savings and the cost of getting things wrong? Most people find it was worth every penny. I have never heard anyone say they regretted getting proper advice on this. Not once.

Disclaimer

Keystone Estate Planning is not a law firm and does not provide legal advice. We are not regulated financial advisers and do not provide financial advice. Everything in this guide is for general information only and should not be treated as a substitute for professional advice based on your own circumstances. Tax rules and pension laws change. The April 2027 IHT changes described here are based on what was announced in the Autumn Budget 2024 and could still be amended before they take effect.

If you need advice about your own pension arrangements, inheritance tax position, or estate plan, please speak to a qualified solicitor or independent financial adviser.

What Keystone can help with

Pensions sit outside your Will. But the Will itself still sits right at the heart of your estate plan. At Keystone Estate Planning, our online service helps you put together a properly structured Will that works hand in hand with your pension arrangements. We walk you through it with plain explanations at every step, so your Will and your wider planning are pulling in the same direction.

Check your pension nominations today. And if your Will needs bringing up to date, or you have never written one at all, our service can help you get that sorted. No jargon. No confusion. Just a Will that does what it is supposed to do.