“What happens to my SIPP when I die?” / “Will my wife get my pension?” / “How much IHT will my kids pay on my pension after 2027?” / “Is my pension tax-free to my beneficiaries if I die before 75?” / “How much will my spouse get from my DB pension?”
| Rule | Detail |
|---|---|
| DC pension death before 75 | Tax-free to beneficiaries (lump sum within LSDBA £1,073,100; drawdown unlimited) |
| DC pension death at 75+ | Beneficiary’s marginal income tax rate (20% / 40% / 45%) |
| Pensions and IHT | Fully exempt — pensions do not form part of the estate |
| Two-year rule | Lump sums paid 2+ years after administrator knew of death are taxed at beneficiary’s marginal rate (even if member died before 75) |
| DB spouse pension | Ongoing income, taxed at beneficiary’s marginal rate |
| DB death lump sum | Held in trust, typically outside estate and tax-free |
| Rule | Detail |
|---|---|
| Pensions and IHT | Unused DC pension funds added to estate for IHT |
| IHT rate on pension | 40% on amount above available nil rate bands |
| Pensions to spouse/civil partner | Still exempt (unlimited spouse exemption) |
| Death in service lump sums (life insurance type) | Excluded from April 2027 change |
| Responsible party | Personal representative (executor) reports and pays IHT on pensions |
| Withholding mechanism | Personal representative can instruct scheme administrator to withhold 50% of benefits for up to 15 months |
| Pensions to DC pension under age 75 (income tax) | Unchanged — still tax-free to beneficiaries |
| Pensions to DC pension at 75+ (income tax) | Unchanged — beneficiary’s marginal rate |
| Parameter | Value | Source |
|---|---|---|
| LSDBA (Lump Sum and Death Benefit Allowance) | £1,073,100 | Finance Act 2024 |
| DC pension — death before 75 — lump sum | Tax-free within LSDBA | HMRC IPTM7820 |
| DC pension — death before 75 — drawdown | Tax-free (no LSDBA cap) | HMRC IPTM7820 |
| DC pension — death at 75+ | Beneficiary’s marginal income tax rate | HMRC IPTM7820 |
| IHT Nil Rate Band | £325,000 | IHTA 1984 / HMRC |
| IHT Residence Nil Rate Band | £175,000 | Finance (No.2) Act 2015 |
| IHT rate | 40% | IHTA 1984 |
| BSP higher rate lump sum | £3,500 | GOV.UK BSP 2025/26 |
| BSP higher rate monthly | £350/month for 18 months | GOV.UK BSP 2025/26 |
| BSP standard rate lump sum | £2,500 | GOV.UK BSP 2025/26 |
| BSP standard rate monthly | £100/month for 18 months | GOV.UK BSP 2025/26 |
| Typical DB spouse rate | 50% (scheme-dependent) | MoneyHelper / scheme rules |
| Death in service typical multiple | 2–4x salary | Industry standard |
| April 2027 IHT change effective date | 6 April 2027 | GOV.UK / Finance Bill 2025-26 |
| Estates affected per year (projected) | ~38,500 paying more IHT | HMRC Impact Assessment |
| Average IHT increase (projected) | ~£34,000 | HMRC Impact Assessment |