Pension Nomination of Beneficiaries: IHT, Discretion and Your Will

Your pension pot is probably one of your largest financial assets — yet it does not pass under your will. Pensions are held in trust by the pension provider, and on your death the trustees decide who receives any remaining fund. Your nomination of beneficiaries (also called an expression of wishes) guides that decision, but the trustees are not legally bound by it.

This guide explains how pension nominations work for defined contribution (DC) pensions, the critical IHT changes coming in April 2027, and how to coordinate your pension beneficiary nomination with your will and wider estate plan.

Why pensions do not pass under your will

Defined contribution pension schemes (personal pensions, SIPPs, workplace DC schemes) hold your fund in trust. You are not the legal owner of the money in the way you own a bank account — the pension trustees own it. Because the fund is trust property, it does not form part of your estate on death and cannot be directed by your will.

Instead, the trustees exercise their discretion to pay the death benefit to whoever they consider appropriate. They are guided by:

• Your nomination of beneficiaries form;
• The scheme rules (which define who can be a beneficiary);
• Their knowledge of your family circumstances at the date of death.

In practice, pension trustees follow the nomination form in the overwhelming majority of cases — provided it is current and reflects your actual wishes. An out-of-date nomination is one of the most common and costly estate planning mistakes.

Types of pension death benefit

What the pension pays on your death depends on the scheme type and your age:

The April 2027 IHT change: pensions brought into estates

Under current rules (before April 2027), unspent DC pension funds are outside the estate for IHT. A pension pot of £500,000 nominally left to children produces no IHT, regardless of the size of the rest of the estate. This made pension funds a highly effective IHT mitigation tool — many advisers recommended deliberately not drawing down pension funds in retirement, preserving them to pass on tax-free.

The October 2024 Budget announced that from 6 April 2027, unused DC pension funds and death benefits will be included in the deceased’s estate for IHT purposes. This is a fundamental change. A pension pot of £500,000 held by a person with an otherwise fully-used nil-rate band will result in IHT of £200,000 payable by the pension trustees before the fund is distributed.

Key points about the new regime:

• The pension trustees will be responsible for reporting the pension to HMRC and paying any IHT attributable to it — the IHT is not paid from the rest of the estate.
• The IHT attributable to the pension will be calculated at the estate’s marginal rate (40% if the nil-rate band is fully used), applied to the pension fund value.
• Transfers to a surviving spouse or civil partner will continue to be exempt from IHT — the spousal exemption applies.
• Income tax on drawdown payments after death continues to apply under the age-75 rules as before. The new rules add IHT on top of income tax for deaths aged 75+ where the nil-rate band is exhausted — potentially a combined rate above 50%.

The April 2027 change makes it more important than ever to review pension nominations and to integrate pension planning with will drafting and lifetime gifting strategy.

How to complete a nomination form

Most pension providers allow you to submit a nomination online through their member portal, or by completing a paper form. You can typically nominate:

• Named individuals (family members, friends, carers);
• A trust — useful where you want greater control over how the money is used;
• A charity;
• Your estate — though this is usually inadvisable (see below).

You can split the nomination between multiple beneficiaries by percentage. For example: 50% to a surviving partner, 25% to each of two adult children.

Do not nominate your estate. Directing the pension to your estate:

• Brings the pension into your estate for probate and (currently) IHT;
• Removes the trustees’ flexibility to respond to changed circumstances;
• Slows payment — the pension waits for grant of probate before it can be distributed.

Nominating a trust as beneficiary

Rather than naming individuals directly, some people nominate a trust as the pension beneficiary. The pension trustees pay the fund into the trust, and the trust then distributes according to its terms. This can be useful where:

• Beneficiaries include minor children who cannot receive a large lump sum directly;
• A beneficiary has a disability and receiving a lump sum might affect their means-tested benefits;
• You want to impose conditions (for example, funds used for education) that the pension trustees themselves cannot impose.

The trust used for this purpose is often a discretionary trust or a vulnerable person’s trust. Legal advice is needed to set up the trust correctly.

Coordinating pension nominations with your will

Your pension nomination and your will operate in parallel, not in sequence. Your will governs your estate (bank accounts, property, investments held directly); your pension nomination governs your pension fund. The two must be consistent and complementary.

Common coordination issues:

• Divorce. Marriage revokes a will, but it does not automatically update a pension nomination. After a divorce, your ex-spouse may still receive your pension if you do not update the nomination form.
• Remarriage. If you remarry, your previous will is revoked but your pension nomination remains in force. Update both.
• IHT planning. After April 2027, the spousal exemption applies to pension funds as well as estate assets. Directing the pension to a surviving spouse defers IHT; directing it to adult children uses their own nil-rate band if they have headroom, but may now trigger IHT at the estate rate. Specialist advice is valuable.
• Equal treatment of children. If your will leaves equal shares to three children but your pension nomination names only one child, the distribution is unequal. Ensure the overall picture is intentional.

Summary

• DC pension funds do not pass under your will — they are paid at the pension trustees’ discretion, guided by your nomination form.
• Keep your nomination form current: update it after marriage, divorce, birth of children, or death of a nominated person.
• From April 2027, unspent pension funds will be included in the estate for IHT. The spousal exemption will apply; transfers to children or others may trigger 40% IHT where the nil-rate band is fully used.
• Do not nominate your estate — name individuals, trusts, or charities instead.
• Review your pension nomination and will together, especially after any major life event or change in the law.