Why pensions are powerful for inheritance
Unlike most assets, a defined-contribution pension normally sits outside your estate and can be passed to nominated beneficiaries. Historically this made pensions one of the most efficient ways to transfer wealth. The rules are changing - from April 2027 most unused pension funds will be brought within inheritance tax (IHT) - but pensions remain a valuable estate-planning tool, especially for the income-tax treatment of what beneficiaries receive.
How pension inheritance works in 2026
| Scenario | Tax on beneficiary | Notes |
|---|---|---|
| You die before 75 | No income tax on withdrawals | Within Lump Sum & Death Benefit Allowance |
| You die at 75 or over | Taxed at beneficiary's income rate | Applies to lump sums and drawdown |
| From April 2027 | Most unused pots within IHT | Major change - plan ahead |
| Spouse beneficiary | Can continue tax-deferred drawdown | Flexible inheritance route |
The age-75 rule is the pivot point: die before 75 and beneficiaries can usually take the fund with no income tax (subject to allowances); die after and they pay income tax at their own rate. The April 2027 IHT change adds a separate layer, so larger estates increasingly need advice.
Choosing a pension for inheritance
- Nominated beneficiary drawdown - the key feature. It lets beneficiaries keep the pot invested and draw flexibly, rather than being forced to take a taxable lump sum. AJ Bell and Hargreaves Lansdown both support this well.
- Keep nominations up to date - an out-of-date "expression of wishes" can send money to the wrong person. Review it after any life change.
- Consider drawing order in retirement - with IHT applying from 2027, it may make sense to spend other assets first and preserve the pension, or vice versa - this is where advice pays.
- Avoid schemes without flexible death benefits - some older or workplace pensions only pay a lump sum, removing beneficiary drawdown options.
Planning around the April 2027 change
The forthcoming inclusion of unused pensions in inheritance tax shifts long-standing strategy. Until now, a common plan was to spend other assets first and preserve the pension as a tax-efficient legacy. From April 2027 that logic weakens for larger estates, because the pension could face both inheritance tax and, if you die after 75, income tax for beneficiaries - a potentially heavy combined burden. Spending the pension during your lifetime, gifting from surplus income, or using other allowances may become more attractive. There is no one-size answer; the right path depends on the size of your estate and family circumstances, which is why advice is increasingly worthwhile.
Spousal bypass and beneficiary choices
A pension can pass to anyone you nominate, not just a spouse, and a thoughtful nomination can spread wealth tax-efficiently across a family. Leaving a pension to a lower-earning adult child or grandchild, who can draw it gradually within their own tax bands, may waste less to tax than a single large lump sum. Beneficiaries who inherit via drawdown can themselves pass on what remains, allowing wealth to cascade down generations within the pension wrapper. These options make the humble expression-of-wishes form one of the most powerful estate-planning documents you will ever complete.
Verdict
The best pension for inheritance is a flexible SIPP offering nominated beneficiary drawdown, such as AJ Bell or Hargreaves Lansdown, with nominations kept current. The April 2027 IHT change makes professional estate-planning advice increasingly worthwhile for larger pots. Compare flexible wrappers in best flexible pension, understand drawdown in best income drawdown provider, and value your estate with our pension calculator.