Understanding Pension Death Benefits
When you die, what happens to your pension depends fundamentally on whether you hold a defined contribution (DC) pension or a defined benefit (DB) pension. The two types of scheme operate under completely different rules when it comes to death benefits, and the distinction can mean the difference between your family receiving hundreds of thousands of pounds or receiving a much more limited income.
This guide compares DC and DB pension death benefits side by side, so you can understand what your loved ones would receive under each arrangement and make informed decisions about your retirement and estate planning.
DC Pension Death Benefits: Full Flexibility
Defined contribution pensions — including workplace DC schemes, personal pensions, SIPPs, and stakeholder pensions — offer the most flexible death benefits of any pension arrangement in the UK. Since the pension freedoms introduced in 2015, DC pension holders have had enormous control over who inherits their pension and how.
Who Can Inherit a DC Pension?
You can nominate anyone you choose as a beneficiary of your DC pension. There are no restrictions based on relationship, dependency, or marital status. This means you can leave your pension to:
- Your spouse or civil partner
- Your children (of any age)
- Your grandchildren
- Other family members, friends, or partners
- A charity or trust
You nominate your beneficiaries by completing an expression of wish (nomination) form with your pension provider. While scheme trustees technically have the final discretion, they will almost always follow a valid, up-to-date nomination.
How DC Death Benefits Are Paid
Your beneficiaries have several options for receiving DC pension death benefits:
- Lump sum — the entire pension pot paid out as a single tax-free or taxable lump sum
- Beneficiary drawdown — the pension remains invested, and beneficiaries draw income as needed
- Beneficiary annuity — purchase a guaranteed income for the beneficiary's lifetime
- Combination — a mix of lump sum and drawdown to suit their needs
Tax Treatment of DC Death Benefits
The tax treatment depends entirely on your age at death:
| Scenario | Tax on Lump Sum | Tax on Drawdown/Annuity |
|---|---|---|
| Death before age 75 | Tax-free (within LSDBA) | Tax-free income |
| Death at age 75 or over | Taxed at beneficiary's marginal rate | Taxed at beneficiary's marginal rate |
DB Pension Death Benefits: More Restrictive
Defined benefit pensions — including final salary and career average (CARE) schemes — operate under much more rigid rules when it comes to death benefits. The scheme rules, not your personal wishes, dictate who can receive benefits and how much they get.
Who Can Inherit a DB Pension?
DB pension death benefits are typically limited to:
- Your spouse or civil partner — entitled to a dependant's pension, usually 50% of your pension (some schemes pay one-third or two-thirds)
- Dependent children — may receive a children's pension, typically until age 18 (or 23 if in full-time education)
- Financial dependants — in some schemes, a cohabiting partner or other person who was financially dependent on you may qualify
You cannot nominate grandchildren, friends, siblings, or anyone who was not financially dependent on you to receive an ongoing DB pension. This is one of the most significant limitations of DB schemes compared to DC arrangements.
Types of DB Death Benefits
DB schemes typically provide several categories of death benefit depending on when you die:
| When You Die | What Is Paid | Who Receives It |
|---|---|---|
| Before retirement (in service) | Lump sum (typically 2–4x salary) plus spouse/dependant pension | Nominated beneficiaries (lump sum); spouse/dependants (pension) |
| Before retirement (deferred member) | Spouse/dependant pension based on your accrued benefits | Spouse/civil partner and dependent children |
| After retirement (first 5–10 years) | Balance of guarantee period payments plus ongoing spouse pension | Nominated beneficiary (guarantee); spouse/dependants (pension) |
| After retirement (beyond guarantee) | Ongoing spouse/dependant pension only | Spouse/civil partner |
Tax Treatment of DB Death Benefits
DB pension death benefits are taxed differently from DC benefits:
- Lump sum death-in-service benefit — usually tax-free if paid within two years of death and within the lump sum and death benefit allowance (LSDBA)
- Dependant's pension — taxed as income at the recipient's marginal rate, regardless of your age at death
- Guarantee period payments — taxed as income at the recipient's marginal rate
Side-by-Side Comparison
| Feature | DC Pension | DB Pension |
|---|---|---|
| Who can inherit | Anyone you nominate | Spouse, civil partner, dependent children only |
| Nomination freedom | Complete flexibility | Limited by scheme rules |
| Tax-free if death before 75 | Yes (lump sum and drawdown) | Lump sum only; dependant's pension always taxed |
| Beneficiary drawdown available | Yes | No |
| Amount inherited | Entire remaining pension pot | Typically 50% of member's pension |
| Inheritance tax position | Outside estate (until April 2027) | Outside estate |
| Lump sum death benefit | Entire pot can be taken as lump sum | Death-in-service benefit only (if applicable) |
| Ongoing income for beneficiary | Flexible drawdown or annuity | Fixed dependant's pension |
Death-in-Service Benefits: A Closer Look
If you die while still employed and a member of a DB scheme, your employer's scheme will typically pay a lump sum death-in-service benefit. This is usually calculated as a multiple of your pensionable salary:
- Public sector schemes — typically 2x annual pensionable pay
- Private sector DB schemes — typically 3–4x annual pensionable pay
This lump sum is separate from the dependant's pension and is usually paid at the trustees' discretion. You can nominate who should receive it via an expression of wish form, and unlike the dependant's pension, the lump sum can go to anyone — not just dependants.
DC schemes may also offer death-in-service life cover through a separate group life policy, but the core death benefit is simply the value of your pension pot.
The April 2027 Inheritance Tax Change
The government announced in the Autumn Budget 2024 that from April 2027, unused pension funds and death benefits will be brought within the scope of inheritance tax (IHT). This change will affect both DC and DB pensions, though the practical impact will be felt most acutely by DC pension holders who have been using their pensions as inheritance planning vehicles.
Under the proposed rules:
- The value of your pension pot at death will be added to your estate for IHT purposes
- If your total estate (including pension) exceeds the nil-rate band (£325,000, or £500,000 with the residence nil-rate band), IHT at 40% could apply
- There may be double taxation risks where both IHT and income tax apply to the same pension funds
When Might You Consider Transferring DB to DC?
Some people consider transferring their DB pension to a DC arrangement specifically to gain more flexible death benefits. While this can be a valid reason, it must be weighed against the significant advantages of retaining a DB pension:
- Guaranteed income for life — a DB pension pays a known income regardless of investment performance or how long you live
- Inflation protection — many DB schemes increase pensions in line with inflation
- No investment risk — the employer and scheme bear the investment risk, not you
Transferring purely for death benefit reasons may not be appropriate if you depend on the guaranteed income in retirement. However, if you have other income sources, are in good health, and want to maximise what you leave to non-dependant beneficiaries, it could be worth exploring.
If your DB pension transfer value exceeds £30,000, you are legally required to take regulated financial advice before transferring. Read our guide on whether it is ever worth transferring a final salary pension for a thorough analysis.
Practical Steps: Protecting Your Family
Regardless of whether you hold DC or DB pensions, there are steps you should take to ensure your death benefits reach the right people:
- Complete nomination forms for every pension you hold — DC and DB
- Review nominations regularly, especially after marriage, divorce, births, or bereavements
- Understand your DB scheme rules — request a copy of the scheme booklet and check exactly what death benefits are provided
- Consider the interaction with your will — pension nominations are separate from your will, but both should form a coherent estate plan
- Seek professional advice if you have complex family arrangements, large pension pots, or both DC and DB pensions
Next Steps
Review all your pension arrangements and understand exactly what death benefits each one provides. If you hold both DC and DB pensions, consider how they work together as part of your overall estate plan. For help understanding your options or deciding whether a DB transfer might improve your family's position, speak to an FCA-regulated pension adviser.
For further reading, see our guides on pension death benefits, leaving your pension to grandchildren, and dependant's vs nominee's pensions.