Seven biggest pension myths exposed

Pensions can be passed onto your loved ones when you die, although from 2027 they will fall into the scope of inheritance tax for the first time.

Under current rules, if you have a defined contribution pension and die before you retire, your pension will usually pass tax-free to the person you nominated when you first started paying into it.

If you didn’t nominate anyone, the trustees of your pension can award it to anyone who’s financially dependent on you, for example, your children or spouse.

If you die after you’ve retired but before the age of 75 and you were taking an income from your pension using flexible drawdown or flexi-access drawdown at the time, your dependents can receive a tax-free income from your pension. However, if you die when you’re over the age of 75, your pension pot will still transfer tax-free, but your dependents will have to pay income tax on any income they receive from it, in the same way as you would have.

It’s usually only if you’ve used your pension to buy an annuity or income for life that your retirement income stops when you die, although some annuities may continue to provide an income for a dependent.

Whilst each scheme is different and you should check the details of your current pension, if you have a defined benefit pension and die before you retire, your scheme may pay out a tax-free lump sum that’s typically two or four times your salary. It may also provide what’s known as a ‘survivor’s pension’ to your beneficiaries.

If you’ve already retired and are receiving an income from your final salary pension when you die, usually a proportion of your pension will be paid to your spouse or partner and/ or any dependent children. You can find out more about this subject in our article What happens to my pension when I die?

However, from April 2027, unused defined contribution pension funds and death benefits payable from a pension will fall into a person’s estate for inheritance tax purposes. From this date, pensioners might be more inclined to draw down their pension pots during their lifetime, rather than preserving them for inheritance purposes. This could lead to a shift in focus towards other tax-efficient savings vehicles, such as ISAs. Find out more in our guide Budget 2024 pension changes.