Contents
Key Takeaways
Age 75 changes how pensions are taxed on death – Death before 75 usually allows pension benefits to pass on tax-free, while death after 75 makes beneficiary withdrawals taxable as income.
Pensions sit outside the will – Pension benefits are paid using beneficiary nominations, not the will, making regular reviews essential to avoid delays or unintended outcomes.
Pensions remain highly effective for legacy planning – Tax-efficient growth and flexibility mean pensions can still play a central role in long-term wealth transfer.
Traditional drawdown assumptions are shifting – Treating pensions as a last-resort asset may no longer be optimal, particularly with future legislative changes in view.
Inheritance tax planning must consider liquidity – Tax due on inherited pensions can force withdrawals at the wrong time if there is no clear plan for funding it.
Proactive reviews reduce future risk – Reviewing nominations, spouse balances, and age-75 scenarios helps prevent unnecessary tax and planning gaps.
Many aspects of financial planning are shaped by quiet thresholds, points that do not attract much attention at the time but which can have a decisive impact later on. Pensions are a clear example. The rules that apply when someone dies are not dramatic or complex, but they are dependent on a small number of specific factors, including age, beneficiary nominations and decisions made many years earlier.
The age of 75 represents one such threshold. It marks a change in the way pension benefits are taxed when they are passed on, with potentially significant consequences for families. Despite this, it is rarely incorporated into long-term planning until circumstances force the issue. Understanding how pensions operate on death, and why they can still be one of the most effective vehicles for passing on wealth, has therefore become an increasingly important part of legacy planning [1].
To explore how these rules work in practice, we spoke with Jo Wellman, Chartered Financial Planner at Quilter Cheviot, who explains what actually happens to pensions on death, why the age 75 threshold matters, and where families most commonly rely on assumptions that no longer reflect how the system works.
Seeing Pensions in a Long-Term Plan
Historically, pensions have often been treated as the final source of income within a financial plan. For many clients, they sit behind ISAs and other taxable investments, reserved as a backstop rather than a primary source of funding. This approach was shaped largely by earlier legislation, but it is now beginning to change.
Effective planning starts with understanding when money is likely to be needed and which assets are most appropriate to draw on first. In many cases, taxable accounts are accessed earlier, while pensions are left untouched for as long as possible. However, with legislative changes expected from April 2027, many of the assumptions that underpinned this approach may need to be reassessed [2].
“I think pensions have always been the last point of call,” Jo explains. “That was predominantly because of the legislation, but that is changing, and it will make quite a big difference to planning.”
The Importance of Beneficiary Nominations
One of the most important, and most frequently overlooked, aspects of pension planning is the completion of beneficiary nominations, often referred to as expressions of wish. Unlike many other assets, pensions typically sit outside the estate and do not automatically follow the instructions set out in a will [3].
Where nominations are unclear or out of date, trustees retain discretion over who receives the benefits. This can introduce uncertainty and delay at what is already a difficult time. For this reason, Jo emphasises that beneficiary nominations should be treated as a fundamental part of pension planning rather than an administrative afterthought.
“With pensions, it’s very important that clients complete their expressions of wish,” she says. “The pension doesn’t necessarily follow the will, so trustees need guidance on where the benefits should go.”
These nominations can usually be amended at any time and should be reviewed regularly, particularly following major life events.
Assumptions About Pensions as a Legacy Asset
Many individuals assume that pensions are inherently efficient vehicles for passing on wealth, and in many circumstances this remains true. As a result, pensions are often left untouched and earmarked specifically for the next generation.
This assumption has shaped financial planning for many years. “For the majority of clients, the pension has always been viewed as a legacy plan,” Jo explains. “It was the backstop, something to fall back on if needed, but ideally left intact.”
However, this approach has also contributed to recent changes in legislation. As pension balances have grown larger and remained unspent, they have increasingly been used as wealth-transfer tools, prompting closer scrutiny from policymakers.
Why Pensions Behave Differently from Other Assets
One of the key reasons pensions remain so effective within long-term planning is the way they are treated during accumulation. Unlike unwrapped investments, assets held within pensions can be bought, sold and rebalanced without triggering capital gains tax.
This allows portfolios within pensions to be managed more flexibly over time, particularly during periods of market volatility. “Within a pension, you have gross roll-up,” Jo explains. “You can rebalance and restructure without any tax implications until you actually start accessing the funds.”
This tax efficiency, combined with the ability to defer withdrawals, makes pensions uniquely suited to long-term planning. It also means that the rules governing what happens on death carry particular importance.
The Significance of the Age 75 Threshold
The age of 75 marks a clear dividing line in the taxation of pension benefits on death. Where a pension holder dies before the age of 75, benefits can generally be passed on to beneficiaries free of tax. Where death occurs after 75, withdrawals are taxed at the beneficiary’s marginal income tax rate [4].
Jo is direct about the implications of this distinction. “From a tax perspective, it’s far more efficient to die before 75 than after,” she explains. “Pre-75, benefits are tax-free to beneficiaries; post-75, they become taxable in their hands.”
There are nuances within this framework, particularly around how benefits are taken and whether they are moved into drawdown rather than paid as a lump sum. These details can materially affect outcomes, but they are often poorly understood [5].
Liquidity: The Overlooked Risk
One of the most practical risks in pension inheritance planning is liquidity. Even where families understand that tax may be due, they do not always consider how that tax will be funded [6].
Jo highlights situations in which a large pension is intended for children, while a surviving spouse relies on other assets for income. If tax becomes payable on the pension, withdrawals may be required at an inopportune time, reducing both the intended legacy and the survivor’s financial security.
“People focus on who the pension is going to,” she explains, “but not always on where the money will come from to pay the tax charge.”
Planning Ahead, Not Reacting Later
A consistent theme running through Jo’s advice is the importance of early and ongoing planning. Reviewing beneficiary nominations, balancing pension contributions between spouses and stress-testing outcomes around the age of 75 can all help to reduce unintended consequences later on.
“It’s a balancing act,” she explains. “You want to get good tax relief going in, but you also want flexibility and tax efficiency when you come to draw income or pass wealth on.”
Pensions remain one of the most effective vehicles for long-term wealth planning. However, they deliver their full potential only when the rules that apply on death are properly understood and incorporated into planning deliberately, rather than being left to chance.
