Yes, in many cases you can leave your pension to your children. However, how the pension is passed on, the tax your beneficiaries may face and whether the pension forms part of your estate can depend on the type of pension, your age when you die and the rules applying at the time.
This is becoming particularly important for UK families because the Government plans to bring most unused pension funds and death benefits within the scope of inheritance tax from 6 April 2027.
If you have built up a substantial pension and intend to leave some or all of it to your children, it is therefore important to understand both the current rules and what is expected to change.
Can You Pass Your Pension on When You Die?
Your beneficiaries could include your spouse or civil partner, children, grandchildren or other people you wish to benefit.
This is different from many other assets. A house, bank account or investment held personally will normally form part of your estate when you die. Pension arrangements have historically often been treated differently.
However, not every pension works in the same way. Defined benefit pensions, annuities and defined contribution pensions can have very different death-benefit rules.
How Do You Nominate Your Children to Receive Your Pension?
Most pension providers allow you to complete a beneficiary nomination, sometimes called an expression of wish.
This tells the pension scheme who you would like to receive your pension benefits after your death.
You may, for example, nominate:
- your spouse or civil partner;
- one or more children;
- grandchildren;
- other family members; or
- another individual or organisation.
It is important to understand that a pension nomination is not necessarily the same thing as leaving an asset through your Will. Depending on the pension scheme, trustees or scheme administrators may retain discretion over who receives the benefits.
For that reason, pension nominations should be reviewed periodically, particularly after major life events such as marriage, divorce, the birth of children or grandchildren, or the death of a previously nominated beneficiary.
Does Your Will Decide Who Receives Your Pension?
Not necessarily.
One of the common misunderstandings in estate planning is assuming that everything you own or control will simply be distributed according to your Will.
Many pension death benefits are governed by the pension scheme rules and your beneficiary nomination rather than simply by the instructions in your Will.
This means you could update your Will but forget to update an old pension nomination.
For families with several pensions accumulated over a working lifetime, checking the nominations attached to each arrangement can therefore be an important part of an estate review.
Do Your Children Pay Tax When They Inherit Your Pension?
The answer depends on the circumstances.
Under the current rules for many defined contribution pensions, the age at which you die can be particularly important.
If You Die Before Age 75
In many circumstances, pension death benefits can be paid to beneficiaries free of income tax if the relevant conditions are satisfied.
There are, however, rules and time limits that can affect the treatment, so families should not assume that every payment will automatically be tax-free.
If You Die at Age 75 or Older
Where taxable pension benefits are inherited after the pension holder dies aged 75 or over, beneficiaries will generally pay income tax when they withdraw taxable money from the inherited pension.
The amount of tax will depend on the beneficiary’s own circumstances and the way in which the pension benefits are taken.
Are Pensions Currently Subject to Inheritance Tax?
Under the current system, many discretionary pension death benefits can normally sit outside the deceased person’s estate for inheritance tax purposes.
This has made pensions very different from many personally owned assets and has influenced how some families have approached retirement and estate planning.
But this area is scheduled for significant change.
What Is Changing to Pensions and Inheritance Tax From April 2027?
From 6 April 2027, the Government plans for most unused pension funds and pension death benefits to be taken into account for inheritance tax purposes.
This could be particularly significant for families who have deliberately preserved pension wealth with the intention of passing it to children or grandchildren.
It does not mean that every inherited pension will automatically suffer a 40% tax charge. The inheritance tax position will depend on the value and structure of the overall estate, available allowances, exemptions and who receives the benefits.
Nevertheless, pensions that may previously have sat outside the inheritance tax calculation could become part of that calculation.
Could Your Children Face Both Inheritance Tax and Income Tax?
This is one of the areas families with substantial pensions need to understand carefully.
Depending on the circumstances after April 2027, a pension could contribute towards the value of an estate for inheritance tax purposes, while withdrawals by a beneficiary may also be subject to income tax.
These are different taxes applied at different stages, and the precise outcome will depend on the circumstances.
This is why looking at a pension in isolation can give an incomplete picture. Its interaction with the rest of the estate can be just as important as the pension itself.
Should You Withdraw Your Pension Before April 2027?
Not automatically.
Removing money from a pension simply because the inheritance tax rules are changing can create other consequences.
Once money is withdrawn, it may become cash or investments held personally. Those assets could themselves form part of your estate for inheritance tax purposes.
You also need to consider retirement income, investment strategy, income tax, liquidity and how much money you may need during your own lifetime.
For this reason, the question should not simply be:
“Should I take money out of my pension?”
A better question is:
“How should my pension work alongside the rest of my estate?”
What Should You Check If You Want Your Children to Inherit Your Pension?
If passing pension wealth to your children is part of your estate planning, some of the areas worth reviewing include:
- what type of pension arrangements you have;
- the current value of each pension;
- who is currently nominated as beneficiary;
- whether those nominations are up to date;
- the death-benefit rules of each pension scheme;
- how your pension interacts with your Will;
- your likely inheritance tax position;
- the potential impact of the April 2027 changes; and
- how much pension wealth you may need for your own retirement.
The objective is not simply to pass on the largest possible pension. It is to understand how the pension fits within your wider estate and what your family may actually receive.
Can You Leave Your Pension to Your Children? The Key Point
Yes, many people can nominate their children to receive pension benefits when they die.
But simply naming your children as beneficiaries does not tell you what the eventual tax position will be.
The pension scheme rules, your age at death, the way benefits are taken, the size of your wider estate and the inheritance tax rules applying at the time can all affect the outcome.
With significant changes planned from 6 April 2027, families holding substantial pension wealth should understand how those pensions fit into their wider estate rather than viewing them as a separate asset.
Understand How Your Pension Fits Into Your Estate
Estate Architect helps families identify potential vulnerabilities across pensions, property, investments and the wider estate before implementation decisions are made.
If your pension represents a significant part of your family wealth, understanding its interaction with inheritance tax can be an important part of assessing your estate.