Pension death benefit nominations: why they matter and what to consider

Completing and regularly reviewing your pension death benefit nominations should be an important part of your wider financial and estate planning. It can help make your wishes clear, reduce delays for your family, and ensure your beneficiaries have access to the widest range of options available under the pension scheme.

This has become an increasingly important area of planning given the tax treatment of pensions on death post April 2027. The new legislation will mean that most pensions and pension death benefits will be brought into scope of Inheritance Tax. This means pension nominations should not be viewed in isolation; they need to work alongside your Will, tax position, family circumstances and wider estate planning. 

What are pension death benefits? 

‘Pension death benefits’ is a term used to refer to the funds and/or income that may be paid from your pension when you die. For defined contribution, or money purchase, pensions, this usually means the value of the unused pension fund. Depending on the scheme rules and the beneficiaries involved, this may be paid as a cash lump sum, used to provide beneficiary’s drawdown (where the monies remain in a pension but in the name of the beneficiary), used to buy an annuity, or paid through a combination of these options. 

The options available are not always the same for every beneficiary, nor (where there is more than one) does each beneficiary have to receive death benefits in the same way. Whilst it will depend on the scheme rules, dependants and named individual beneficiaries usually have the widest range of options. In contrast, charities and trusts can normally only receive lump sums. In some situations, an individual who has not been named explicitly, but whom the scheme administrator/trustees may decide can benefit, may also be restricted to receiving a lump sum.  

What does a death benefit nomination do? 

A pension death benefit nomination, often called an expression of wish, tells the pension scheme administrator or trustees who you would like to receive your pension benefits when you die. It can usually be completed online or using the provider’s form, and it can normally be updated at any time, subject to retaining mental capacity. 

In many pension schemes, the nomination is not legally binding - ironically, this discretion has historically been one of the reasons many pension death benefits have fallen outside an individual’s estate for Inheritance Tax purposes. The administrator or trustees will usually carry out their own review before deciding who should receive the benefits. However, an up-to-date nomination is strong evidence of your wishes, and in most cases the scheme will follow it unless there is a good reason not to; for example, where children were nominated are survived by a spouse who was still financially dependent on the pension benefits.  

Why naming beneficiaries can matter more than the percentages 

When completing a nomination, it is natural to focus on the percentage split between your beneficiaries. That split is important, but naming the right people can be just as important, and sometimes more important from a planning perspective. 

This is because being named can help ensure a beneficiary has access to the full range of death benefit options, where the scheme allows them. For example, a named beneficiary may be able to keep inherited pension funds in beneficiary’s drawdown rather than receiving a taxable lump sum. This can preserve the pension’s tax-efficient investment environment and give the beneficiary more control over when they draw funds. This control can also lead to a better tax outcome where death occurs pre-age 75, because it can reduce the chances of larger fund values facing an income tax charge which may have been due had they been paid as a lump sum (this is explained in more detail below).The tax position: before and after age 75 

The income tax position on pension death benefits depends partly on your age when you die and the form in which benefits are taken. 

• If you die before age 75, pension death benefits can often be paid free of income tax. However, certain lump sum death benefits may be tested against your Lump Sum and Death Benefit Allowance (LSDBA). Pension death benefits paid in excess of the LSDBA will be subject to income tax at the recipient’s marginal rate of tax. 
• If you die after age 75, death benefits are generally taxable at the beneficiary’s marginal rate of income tax when they receive the benefits (in the form of a lump sum or annuity payments) or draw the funds (where inherited as a beneficiary drawdown). 
• Therefore, where benefits can remain in beneficiary’s drawdown, the beneficiary may have more flexibility over when taxable income is taken, rather than receiving everything in one tax year. 

Why April 2027 changes the planning conversation 

From 6 April 2027, most unused pension funds and pension death benefits will be included when calculating the value of an individual’s estate for Inheritance Tax. Existing exemptions, such as benefits passing to a surviving spouse or civil partner, and in some cases to qualifying charities, are expected to remain relevant. Death in service benefits paid from a registered pension scheme are also expected to be excluded from the new rules. 

This change means pensions may need to be considered alongside other assets when planning how wealth passes to the next generation. For some families, the pension may still be an appropriate asset to pass to a spouse. In other cases, it may be worth considering whether funds should ultimately pass to children, grandchildren, a trust or a charity, depending on the family’s objectives, tax position and need for control. 

It is also possible that pension funds could suffer more than one layer of tax in some circumstances. For example, if someone dies after age 75, the pension may first be taken into account for Inheritance Tax and then the beneficiary may also pay income tax when they access the inherited pension funds. This does not mean pension funds should automatically be drawn down during lifetime, but it does mean the strategy should be reviewed carefully. 

Using trusts and bypass trusts 

In some cases, it may be appropriate to nominate a trust to receive pension death benefits, rather than naming individuals directly. A bypass trust is a type of discretionary trust that is set up during your lifetime and then nominated to potentially receive pension death benefits when you die. The pension scheme administrator or trustees would still decide whether to pay benefits to the trust, but if they do, the trustees would then control how and when funds are made available to the intended beneficiaries. 

This can be helpful where more control is needed. For example, a trust may be relevant in blended family situations, where beneficiaries are young or vulnerable, or where there are concerns about divorce, creditors or the money forming part of a beneficiary’s own estate. It can also allow trustees to take account of changing family circumstances after your death, rather than paying everything outright immediately. 

However, trusts are not suitable for everyone. They add complexity, usually require legal advice, and there may be ongoing tax and administration responsibilities. The tax treatment can also be less favourable in some cases, particularly where death is after age 75, in which case pension death benefits paid to a discretionary trust may suffer a 45% income tax charge, although some tax credit may be available when funds are later distributed to beneficiaries.  

Nominating a charity 

If charitable giving is already part of your estate planning, it may be worth considering whether some or all of that gift should be made from your pension rather than from non-pension assets.  

This may become a more valuable planning point under the rules taking effect from April 2027, because pension funds left to a qualifying charity are expected to continue benefiting from the charitable exemption for Inheritance Tax. Where you intend to leave a fixed amount to charity in any event, using pension funds for that gift may help preserve more non-pension assets for family or other beneficiaries, rather than reducing the assets passing to them directly. Separately, if charitable gifts equal at least 10% of the relevant net estate, this can also reduce the rate of Inheritance Tax from 40% to 36%, although this is a wider estate-planning point rather than a benefit specific to pension funds. The pension-specific point is that the funds might otherwise be exposed to Inheritance Tax and, depending on the age at death and how benefits are drawn, potentially income tax as well. 

Practical planning points 

There is no single right answer for everyone. The most appropriate approach will depend on your family circumstances, wider estate, income needs and objectives for passing on wealth, but some practical planning points are: 

• Naming all intended individual beneficiaries, where appropriate (even where they may form part of a class of beneficiaries under a scheme trust deed), so they may have access to the widest range of pension death benefit options. 
• Reviewing nominations around age 75, because the income tax treatment of pension death benefits changes significantly at that point. 
• Deciding whether pension benefits should pass to a spouse or civil partner, particularly where maintaining their financial security is the priority. 
• Exploring whether a charity nomination could support your wider estate planning, especially where charitable giving is already important to you. 
• Assessing whether a trust or bypass trust may be appropriate where control, asset protection or complex family circumstances are important. 
• Ensuring your pension nominations work alongside your Will, lasting powers of attorney and wider estate planning. 

Common pitfalls to avoid 

• Assuming your Will controls your pension. In most cases, it does not. Your pension scheme will usually make its own decision, guided by your nomination.  
• Failing to update nominations after major life events, such as marriage, divorce, separation, the birth of children or grandchildren, or the death of a beneficiary. 
• Naming only one beneficiary where you would like others to have the option of beneficiary’s drawdown. 
• Focusing only on the percentage split and overlooking whether each intended beneficiary has actually been named. 
• Using a binding nomination without understanding the potential tax and planning consequences. 
• Assuming all pension schemes offer the same death benefit options. Some older schemes may not offer beneficiary’s drawdown or may have restrictive rules. 

Ignoring the impact of the April 2027 Inheritance Tax changes when deciding whether pension funds should be preserved or drawn on to provide an income in life, through drawdown or annuity, to be spent or gifted.