Do Pensions Form Part of an Estate in the UK

Do Pensions Form Part of an Estate in the UK?

When someone dies, their estate is made up of all the assets they leave behind — including property, savings, investments, and personal belongings. But when it comes to pensions, the rules are different. In most cases, pensions do not form part of your estate for inheritance tax purposes.

This guide explains how pensions are treated after death in the UK, whether they’re included in your estate, and what steps you should take to ensure your pension is passed on tax efficiently.

What is considered part of an estate?

An estate includes all assets that belong to someone at the time of their death. This typically covers:

• Property (homes, land, and buildings)

• Bank accounts and cash

• Investments (shares, ISAs, bonds)

• Life insurance policies (if not held in trust)

• Cars, jewellery, and personal possessions

When valuing an estate for inheritance tax, HMRC adds up these assets, deducts any debts or liabilities, and assesses the total value against the inheritance tax threshold (currently £325,000 for most people).

Pensions, however, are treated differently.

Do pensions form part of an estate?

In most cases, no — pensions do not form part of your estate for inheritance tax purposes. This applies particularly to defined contribution pensions, such as:

• Personal pensions

• Self-Invested Personal Pensions (SIPPs)

• Most workplace pensions

These pensions are usually held in trust by the pension provider. Because you don’t technically own the funds, they are excluded from your estate when you die.

Instead, your pension provider has discretion over who receives your pension benefits, based on your nominated beneficiaries (sometimes called an “expression of wish”).

When might pensions form part of an estate?

There are some exceptions where pension benefits could be included in your estate:

1. No nomination in place

If you fail to nominate a beneficiary, the provider may pay the death benefits to your estate, which could make them liable for inheritance tax.

2. Death benefits paid as a lump sum from a defined benefit scheme

Some older defined benefit pensions (like final salary schemes) may pay a lump sum death benefit. If this is paid directly to your estate, it may be included for inheritance tax purposes.

3. Pension payments already received

If you die after taking lump sums from your pension (e.g. via drawdown), those funds become part of your estate — especially if they’re sitting in your bank account or invested elsewhere.

4. Pension transferred shortly before death

If you transfer your pension and die within two years, HMRC may investigate whether the transfer was intended to avoid inheritance tax. If so, the pension value could be added to your estate.

How to keep pensions out of your estate

To ensure your pension remains outside your estate and passes to your loved ones tax efficiently:

• Complete a nomination form with every pension provider you have

• Keep your nominations up to date, especially after life events such as marriage, divorce, or the birth of children

• Consider flexible drawdown for beneficiaries rather than lump sums

• Take advice before transferring pensions, especially later in life

• Be aware of the rules if you have a defined benefit scheme or older pensions with unusual structures

By doing this, your pension provider will usually have discretion to pay benefits directly to your chosen beneficiaries — bypassing probate and inheritance tax.

What about inheritance tax on pensions?

While pensions are usually excluded from your estate, other taxes may still apply, depending on your age at death.

• If you die before age 75, beneficiaries can usually inherit your pension tax-free

• If you die after age 75, any pension income or lump sums your beneficiaries receive will be taxed as income at their normal rate

• There is no inheritance tax on pensions left to individuals via nomination, unless paid to the estate

The inheritance tax position is therefore generally favourable, but income tax may still apply.

Final thoughts

In the UK, pensions are normally not included in your estate for inheritance tax purposes. This makes them one of the most tax-efficient ways to pass on wealth to your family.

To take full advantage of these rules, it is essential to:

• Nominate beneficiaries for every pension you hold

• Understand your scheme’s death benefits

• Get financial advice if your situation is complex

Pensions are not just for retirement income — they can also be a powerful estate planning tool when used wisely.