How to Leave Your Pension to Grandchildren

Why Consider Leaving Your Pension to Grandchildren?

Pensions are one of the most tax-efficient assets you can pass on to the next generation. Unlike most other assets, pension funds generally sit outside your estate for inheritance tax (IHT) purposes. This means your grandchildren could potentially receive your entire pension pot without a 40% IHT deduction.

For grandparents with substantial pension savings, this creates a powerful opportunity. Rather than spending your pension first and leaving other assets (which may be subject to IHT), you might preserve your pension specifically as a legacy for your grandchildren.

There are several compelling reasons to consider this approach:

• Tax efficiency — pension benefits paid to grandchildren can be completely tax-free if you die before age 75
• Long investment horizon — young grandchildren have decades for the funds to grow
• Flexibility — grandchildren can draw down the pension at their own pace over their lifetime
• IHT planning — pensions generally fall outside your estate, unlike property, ISAs, or cash savings

Which Pensions Can You Leave to Grandchildren?

Not all pensions work the same way when it comes to nominating grandchildren as beneficiaries. The type of pension you hold determines what is possible.

Defined Contribution (DC) Pensions

DC pensions offer the greatest flexibility. You can nominate anyone you choose as a beneficiary — including grandchildren, regardless of their age or financial dependence on you. This includes workplace pensions, personal pensions, SIPPs, and stakeholder pensions.

Your grandchildren can receive the benefits as a lump sum, take income through flexi-access drawdown, or a combination of both. There is no requirement to draw down the entire pot by a certain date.

Defined Benefit (DB) Pensions

DB pensions (final salary or career average schemes) are far more restrictive. Death benefits are typically limited to:

• A spouse's or civil partner's pension (usually 50% of your pension)
• A dependent children's pension (usually payable until age 18 or 23 if in full-time education)

Grandchildren do not usually qualify for DB pension death benefits unless they were financially dependent on you. If leaving your pension to grandchildren is a priority, you may wish to explore whether transferring your final salary pension to a DC arrangement could be appropriate, though this is a major decision requiring regulated financial advice.

How to Nominate Your Grandchildren

The process for nominating grandchildren as pension beneficiaries is straightforward but must be done correctly.

Step 1: Complete a Nomination Form

Contact each of your DC pension providers and request a nomination form (sometimes called an expression of wish form). You can typically download these from your provider's website or online portal.

Step 2: Specify Your Grandchildren

On the form, list each grandchild you wish to benefit. Include their full name, date of birth, and relationship to you. Specify the percentage share each grandchild should receive. You can split the nomination however you wish — equally, or with different proportions.

Step 3: Consider Contingent Nominations

Think about what should happen if a nominated grandchild predeceases you. You can include contingent nominations specifying who should receive that share instead.

Step 4: Keep It Updated

Review and update your nomination forms after any significant family event — births, deaths, marriages, divorces, or changes in family circumstances.

Tax Rules: The Age 75 Threshold

The tax treatment of inherited pensions depends critically on your age at death:

The age 75 rule is crucial for planning. If you die before 75, your grandchildren receive everything completely free of income tax. If you die at 75 or over, withdrawals are taxed at their marginal rate. However, since many grandchildren may be students, apprentices, or early in their careers, their marginal tax rate could be as low as 0% (within the personal allowance) or 20%.

The Lump Sum and Death Benefit Allowance

Since April 2024, the lump sum and death benefit allowance (LSDBA) limits the total amount that can be paid as a tax-free lump sum on death before age 75 to £1,073,100 (unless you hold transitional protection for a higher amount). Amounts exceeding the LSDBA are taxed at the recipient's marginal income tax rate. For more detail, see our guide to the lump sum and death benefit allowance.

Bypassing Your Children: Is It Possible?

With a DC pension, you have complete freedom over who you nominate. You can leave your pension entirely to your grandchildren, bypassing your own children. This is a legitimate and common estate planning strategy.

Reasons you might choose this approach include:

• Your children are already financially comfortable and do not need additional funds
• You want to help grandchildren with education costs, first home deposits, or starting in life
• Your children have their own pensions and other assets to rely on
• You want to skip a generation to maximise the long-term investment growth potential

However, be aware that the scheme trustees technically have the final say on who receives death benefits, even though they will almost always follow a valid nomination. Keeping your nomination form current and clearly worded reduces any risk of dispute.

Using a Bypass Trust

A pension bypass trust (also called a spousal bypass trust or discretionary trust) is an arrangement where your pension death benefits are paid into a trust rather than directly to individual beneficiaries.

When a Trust Makes Sense

• Minor grandchildren — a trust lets trustees manage the money until grandchildren are old enough to handle it responsibly
• Protection from claims — funds held in trust are generally protected from divorce settlements, creditors, or bankruptcy of the beneficiaries
• Flexibility — trustees can distribute funds according to changing circumstances across multiple grandchildren
• Incapacity concerns — if a grandchild has a disability or vulnerability, a trust can manage funds on their behalf

When a Trust May Not Be Needed

For straightforward situations — adult grandchildren who are financially responsible — a direct nomination is usually simpler, cheaper, and avoids the ongoing administrative burden of running a trust. Trusts involve setup costs (typically £1,000–£3,000 for legal fees) and ongoing trustee responsibilities.

Practical Example: How It Works

Consider Margaret, aged 70, with a £400,000 SIPP. She has two children (both financially secure) and four grandchildren aged 5 to 15. Margaret decides to nominate her four grandchildren equally on her SIPP nomination form.

If Margaret dies at 73:

• Each grandchild inherits £100,000 completely tax-free (death before 75)
• Each grandchild can leave the money invested in a beneficiary drawdown arrangement
• Over 30–50 years, at 5% annual growth, each £100,000 could grow to £430,000–£1.15 million
• No inheritance tax is payable on the pension funds

If Margaret instead dies at 78, the grandchildren would pay income tax at their marginal rate on any withdrawals, but could still benefit from decades of tax-free growth inside the pension wrapper.

Strategies to Maximise What Grandchildren Receive

• Spend other assets first — draw income from ISAs, savings, and investments before touching your pension. This preserves the pension's IHT-free status.
• Delay pension withdrawals — the longer your pension remains invested, the more potential growth for your grandchildren.
• Keep nomination forms updated — ensure every new grandchild is included and percentages reflect your wishes.
• Consider advice — a financial adviser can model different scenarios and optimise your overall estate plan. Get matched with a pension adviser for personalised guidance.

Common Pitfalls to Avoid

• Forgetting to complete nomination forms — without a nomination, trustees decide who receives benefits and may not choose your grandchildren
• Not updating after life changes — a nomination to a former spouse could mean grandchildren miss out entirely
• Ignoring DB pension restrictions — you cannot simply nominate grandchildren on a DB pension; the scheme rules dictate who qualifies
• Overlooking the LSDBA — for larger pensions, amounts above the allowance are taxed even on death before 75
• Not considering the April 2027 IHT changes — the rules may change significantly, so plan accordingly

Next Steps

Review all your pension arrangements and check who is currently nominated. If you want your grandchildren to benefit, update your nomination forms as soon as possible. For larger pension pots or more complex family situations, speak to a regulated financial adviser who can help structure your plans effectively.

If you hold a defined benefit pension and are considering whether a transfer might be appropriate for inheritance planning, be sure to read our guide on FCA advice requirements for DB transfers before taking any action.