Pensions and Intestacy UK (2026): Why Your Will Doesn't Control Your Pension Death Benefits

Pension death benefits have a unique legal status that places them outside both the will and the intestacy rules: (1) HOW PENSIONS ARE STRUCTURED: most workplace pensions and personal pensions (SIPPs, personal pension plans) are held under discretionary trust arrangements. The pension fund is legally held by the pension trustees — not by the member. The member has a beneficial interest in the fund during their lifetime but does not own the assets outright in the same way as a bank account; (2) DISCRETIONARY PAYMENT OF DEATH BENEFITS: on the member's death, the pension trustees have discretion to pay the death benefits — the remaining fund or a lump sum — to any one or more of the eligible beneficiaries (dependants and nominees). The trustees are NOT legally required to follow the member's will; they are NOT bound by the intestacy rules; (3) WHY THE WILL DOES NOT CONTROL PENSION BENEFITS: because the pension assets are held in trust by the pension trustees, they do not form part of the deceased's estate. They cannot be directed by a will or GRANTED as part of a probate estate. Even if the will says 'I leave my pension to my daughter', this has no legal effect on the pension trustees' decision; (4) THE INTESTACY RULES DO NOT APPLY: the intestacy rules (AEA 1925 s.46) apply to assets in the estate — those owned beneficially by the deceased at death. Pension death benefits are held in trust and therefore lie outside the estate. A cohabiting partner who receives nothing under intestacy rules (because they are not married) may still receive the pension if named on the expression of wishes form and the trustees exercise their discretion in their favour; (5) ESTATE ASSETS VS NON-ESTATE ASSETS: (a) IN THE ESTATE (governed by will/intestacy): bank accounts in sole name; property in sole name; investments; cash; personal possessions; (b) NOT IN THE ESTATE (NOT governed by will/intestacy): pension death benefits; life insurance placed in trust; jointly owned property (by right of survivorship); assets already given away as gifts.

An expression of wishes (also called a 'nomination of beneficiary' form or 'death benefit nomination') is the form a pension member completes to tell the trustees who they would like to receive the death benefits: (1) WHAT IT IS: a written statement (usually on the pension scheme's own form) naming one or more individuals (and optionally percentages) who the member wishes to receive the death benefits. It may also name charities, trusts, or the member's estate; (2) THE TRUSTEES ARE NOT BOUND: the expression of wishes is exactly that — an expression of wishes. The trustees take it into account but have full discretion to pay any eligible beneficiary. They are not legally bound to follow the member's stated wishes. This is deliberate — it keeps the pension outside the estate for IHT purposes; (3) IN PRACTICE — HOW MUCH WEIGHT DO TRUSTEES GIVE IT: in the vast majority of cases, pension trustees do follow the expression of wishes if it is current, clear, and the named beneficiaries are eligible. A current, valid expression of wishes naming a spouse or children will almost always be followed without enquiry. Trustees are more likely to deviate where: (a) the form is out of date (e.g. named a now-deceased spouse); (b) the form names a beneficiary who is not a dependant and not an eligible nominee; (c) there are competing claims from dependants not named; (d) the member's circumstances have changed significantly since the form was completed; (4) ELIGIBLE BENEFICIARIES: for most pension schemes, eligible beneficiaries include: (a) the member's spouse or civil partner; (b) any person financially dependent on the member; (c) any person with whom the member has a financial interdependency relationship; (d) the member's children (minors and adults); (e) from April 2011: nominated non-dependants can also be named; (5) KEEPING THE FORM CURRENT: the expression of wishes should be reviewed and updated: (a) on marriage or formation of a civil partnership; (b) on divorce or separation; (c) on birth of a child or grandchild; (d) on death of a named beneficiary; (e) on any major change in financial circumstances; (f) at least every 5 years as good practice.

The income tax treatment of pension death benefits depends critically on whether the member died before or after their 75th birthday: (1) DEATH BEFORE AGE 75 (INCOME TAX-FREE IF PAID WITHIN 2 YEARS): under the Finance Act 2004 and subsequent amendments, if a member dies before age 75 and the pension administrator designates the funds for payment within 2 years of the member's death (or within 2 years of being notified of the death), the death benefits are INCOME TAX FREE in the hands of the beneficiary. This applies to: (a) lump sum death payments; (b) flexi-access drawdown (the beneficiary can draw down at any time income tax free); (c) annuity purchased from the pension fund. The beneficiary pays no income tax on any amount they draw from the inherited pension; (2) DEATH BEFORE 75 BUT FUNDS NOT DESIGNATED WITHIN 2 YEARS: if the 2-year deadline is missed — for example, because the pension trustees were not notified promptly, or administration was delayed — the funds lose the tax-free status. They become subject to income tax at the beneficiary's marginal rate when drawn; (3) DEATH AFTER AGE 75: where the member died at 75 or older, ALL pension death benefits — whether lump sums or ongoing drawdown — are taxed as INCOME in the hands of the beneficiary at their marginal rate of income tax. If the beneficiary is a basic rate taxpayer, they pay 20%. A higher rate taxpayer pays 40%. There is no inheritance tax (currently — see below); (4) DEFINED CONTRIBUTION (DC) PENSIONS: the above rules apply to DC pensions (SIPPs, personal pension plans, money purchase workplace pensions) where the member has an identifiable pot; (5) DEFINED BENEFIT (DB) PENSIONS: the position is different: (a) spouse's pension — a continuing income stream for the surviving spouse/CP; taxed as income; no capital payment; (b) children's pension — continuing payments until a set age; (c) lump sum death in service — discretionary payment; subject to the same expression of wishes and income tax rules as DC pensions; (d) the specific terms depend on the scheme rules.

The October 2024 Budget announced a fundamental change to the IHT treatment of pensions that will reshape estate planning from April 2027 onwards: (1) THE CURRENT POSITION (UNTIL APRIL 2027): DC pension pots are NOT subject to IHT. They pass outside the estate through the trustees' discretion and are income-tax-free if the member died before 75 (within 2 years). This makes pensions the most tax-efficient vehicle for passing wealth to the next generation; (2) THE CHANGE FROM APRIL 2027: unspent DC pension pots will be included in the estate for IHT purposes. The pension pot will be added to the deceased's other estate assets. Any amount above the NRB (£325,000) will be subject to IHT at 40%. The pension trustees will be responsible for accounting to HMRC for the IHT on the pension portion; (3) THE DOUBLE TAX RISK: where the pension passes to a non-spouse beneficiary after death at 75+: (a) IHT at 40% on the pension pot above the NRB (as part of the estate from April 2027); AND (b) income tax at the beneficiary's marginal rate when they draw the funds. The two taxes are applied on different measures (IHT on the full value; income tax on the drawn amount) but the combined burden can exceed 55-60% on funds drawn by a higher rate taxpayer; (4) WHAT THE CHANGE DOES NOT AFFECT: (a) pension pots passing to a surviving SPOUSE or civil partner — subject to the spouse exemption, so IHT-free at the first death (though IHT will arise on the surviving spouse's death); (b) defined benefit spouse's pensions — a continuing income stream is not a capital asset in the estate; (c) death in service lump sums — these remain discretionary and outside the estate if properly structured; (5) PLANNING STEPS BEFORE APRIL 2027: (a) consider drawing down the pension pot more rapidly to reduce the pot size — converting it to usable income or spending; (b) consider an annuity — the pension pot converts to income, removing the IHT exposure; (c) check whether using the pension to make IHT-exempt gifts (normal expenditure from income, annual exemptions) makes sense; (d) update expression of wishes forms — the spouse remains the most IHT-efficient recipient under the spouse exemption; (e) review the overall estate plan with a financial adviser who understands the post-2027 position.

Because pension death benefits lie outside the estate, the absence of a will has no direct effect on where the pension goes. But the indirect effects are significant: (1) THE PENSION WITHOUT AN EXPRESSION OF WISHES: if a member dies without having completed an expression of wishes form, the pension trustees must use their discretion entirely without guidance. They will look for eligible beneficiaries — typically the deceased's dependants (spouse, civil partner, children). Without a form, the trustees may: (a) take longer to make their decision — requiring evidence of dependants; (b) divide the funds between multiple potential claimants rather than concentrating them as the member intended; (c) default to paying to the estate if no eligible dependants can be identified; (2) WHEN THE PENSION FALLS TO THE ESTATE: if the pension trustees pay the death benefits to the estate — either because there are no eligible beneficiaries or at the member's direction — the funds then DO enter the estate and ARE governed by the intestacy rules. This is the worst of all worlds: the pension loses its income-tax-free status (paid to the estate, not to a named beneficiary) and is distributed according to the intestacy hierarchy, not the member's wishes; (3) THE INTESTACY/PENSION INTERACTION — A COHABITING PARTNER: the most poignant example. A and B cohabit for 20 years, never marrying. A dies intestate with a £500,000 pension and a £400,000 house. The house (estate asset) passes on intestacy to A's surviving children — B receives nothing. The pension: if A had named B on the expression of wishes form, and B is financially dependent on A, the trustees may still pay the pension to B. B's only hope of receiving any benefit is through the trustees' discretion. Without an expression of wishes form, B has no documented claim; (4) THE SOLUTION — TWO DOCUMENTS: (a) make a will (which governs all estate assets including the house, savings, and personal property); (b) complete and maintain a current expression of wishes form for every pension (which tells the trustees where the pension should go). These two documents together ensure that all assets — in and out of the estate — are directed to the right people; (5) FOR INTESTACY ESTATES WITH A PENSION: if the deceased died intestate, the executors (administrators) have no authority over the pension. The pension trustees decide independently. The administrator should promptly inform the pension provider of the death and provide contact details for any potential dependants — giving the trustees the information they need to exercise their discretion.