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Pension

Also known as: Retirement Fund, Pension Scheme

Definition

A pension is a retirement savings arrangement where contributions are invested during your working life to provide income and lump sums when you retire, with favorable tax treatment and estate planning benefits.

Pensions are typically the second-largest asset people own (after property) and pass to nominated beneficiaries outside your will when you die.

What Does Pension Mean?

Under the Pension Schemes Act 1993, a pension scheme is "a scheme or other arrangements, comprised in one or more instruments or agreements, having or capable of having effect so as to provide benefits" on retirement. There are two main types: defined benefit pensions (final salary schemes) that pay guaranteed income based on your salary and years of service, and defined contribution pensions (money purchase schemes) that build a pot of money from your contributions, your employer's contributions, and government tax relief. For every £80 you contribute as a basic rate taxpayer, the government adds £20 in tax relief—higher rate taxpayers can claim additional relief through their tax return.

Pensions are often the second-largest asset in most estates after property. Unlike bank accounts or property, pensions don't pass through your will—they're controlled by pension scheme rules. You nominate beneficiaries via an "expression of wish" or "pension nomination" form that guides the pension trustees, who usually (but aren't required to) follow your wishes. Under current rules until April 2027, most pensions pass free of Inheritance Tax. If you die before age 75, beneficiaries typically receive your pension tax-free. If you die after age 75, they pay income tax on withdrawals at their marginal rate. Emma, age 45, contributes 5% of her £45,000 salary (£2,250 per year) to her workplace pension. Her employer adds 3% (£1,350) and the government adds tax relief (£562.50), making total annual contributions £4,162.50.

From 6 April 2027, the government will bring most unused pension funds and death benefits within the value of your estate for Inheritance Tax purposes. Personal representatives (executors) will be liable for reporting and paying the 40% Inheritance Tax on pensions. The government estimates this will affect 10,500 estates that previously had no IHT liability, and approximately 38,500 estates will pay more Inheritance Tax—an average increase of around £34,000 per estate. This removes the current incentive to use pensions purely as IHT-free wealth transfer vehicles and may influence whether you draw down your pension in retirement versus preserving it for inheritance. Important exception: death in service benefits from registered pension schemes remain outside the IHT net from April 2027.

Common Questions

"Does my pension form part of my estate when I die?" Most pensions do not automatically form part of your estate and typically pass outside your will to nominated beneficiaries. However, from April 2027, unused pension funds will be subject to Inheritance Tax. If you haven't nominated beneficiaries, the pension may fall into your estate and require probate.

"Can I control who inherits my pension in my will?" No, you cannot control pension inheritance through your will. Pensions are governed by scheme rules, not your will. Instead, you complete a pension nomination form (expression of wish) naming your preferred beneficiaries. While trustees have discretion, they usually follow your wishes.

"What's the difference between defined benefit and defined contribution pensions?" A defined benefit pension (final salary scheme) pays a guaranteed income based on your salary and years of service. A defined contribution pension (money purchase scheme) builds a pot of money from contributions and investment growth, which you then use to fund your retirement—the value can fluctuate.

Common Misconceptions

Myth: My pension will automatically go to my spouse or children when I die.

Reality: While pension trustees often prioritize spouses and dependents, pensions don't automatically pass to family members. According to HMRC's Pensions Tax Manual, "most UK pension schemes allow members to nominate specified beneficiaries, but these are generally not binding nominations—they are expressions of wish." You must complete a pension nomination form to guide trustees toward your preferred beneficiaries, and trustees have discretion to consider all dependents' financial circumstances.

Myth: Pensions are always tax-free when inherited.

Reality: Pension death benefits have complex tax treatment that varies by age at death and timing. If you die before age 75, beneficiaries typically receive the pension tax-free. If you die after age 75, beneficiaries pay income tax at their marginal rate on withdrawals. Additionally, from April 2027, unused pension funds will be subject to 40% Inheritance Tax regardless of age at death, fundamentally changing estate planning strategies for many families.

  • Beneficiary: The person or organization who receives your pension death benefits according to your nomination form and trustee decisions.
  • Death Benefits: The lump sum payments or ongoing pensions paid from your pension scheme when you die.
  • Nomination: The expression of wish form you complete to guide trustees on who should receive your pension death benefits.
  • Defined Benefit Pension: Final salary schemes that pay guaranteed income and typically provide dependent pensions rather than lump sum transfers.
  • Defined Contribution Pension: Money purchase schemes where the entire fund value can pass to beneficiaries you nominate.

Need Help with Your Will?

Understanding how your pension integrates with your will is essential for comprehensive estate planning, especially with pensions becoming subject to Inheritance Tax from April 2027. Many people don't realize pensions require separate nomination forms that work alongside—not within—your will.

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Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.