Please note Scottish Friendly does not provide advice. This guide is for information purposes only. If you’re not sure how your pension works or what is suitable for you, you should contact your pension provider or a professional adviser for advice. Advisers may charge for providing such advice and should confirm any cost beforehand.
Personal pensions (including SIPPs)
Most personal pensions today are defined contribution schemes. That means you build up a pot of money over time, which you can then use in retirement.
If you die before taking money from your pension
If you haven't started taking money yet, your pension pot can usually be passed on to your chosen beneficiaries
If you die before your 75th birthday, it can normally be paid tax-free
If you die on or after your 75th birthday, your chosen beneficiaries will usually pay income tax on what they receive
They may be able to take the money in different ways, such as a lump sum or as income through regular or occasional withdrawals.
Make sure your wishes are known
Pensions don’t usually form part of your estate and aren’t covered by your will. Instead, your provider will look at your nomination (sometimes called an “expression of wish”) to help guide their decision.
It’s a good idea to:
Name the people you’d like to receive your pension
Keep your nomination up to date
Review it if your circumstances change
If you have a pension with us, you can update your nomination by contacting us through your online account (as applicable). If you have pensions with other providers, contact them directly to check how to make or update a nomination.
If you don’t make a nomination, your provider has the right to decide who receives the money. The outcome might not always match what you have wanted.
What about inheritance tax?
Pensions are often outside your estate for inheritance tax purposes, which can make them a helpful way to pass on money.
That said, tax can still apply depending on:
Your age when you die. If you die before your 75th birthday, benefits paid to your chosen beneficiaries can normally be paid tax-free. If you die on or after your 75th birthday, your chosen beneficiaries will usually pay income tax on what they receive.
How your chosen beneficiaries take the money, for example as a lump sum, regular income payments or occasional withdrawals.
Changes to inheritance tax (from April 2027)
The rules around pensions and inheritance tax are changing.
At the moment, most personal pensions (including many Section 32 policies) are usually outside your estate for inheritance tax purposes. That’s one of the reasons they’ve often been used as a way to pass on money.
However, this is due to change.
From 6 April 2027, most unused pension funds and death benefits are expected to be included as part of your estate for inheritance tax purposes, find our more.
This means they could be taxed at up to 40%, depending on the value of your estate and available allowances.
What this could mean for you
Pensions may no longer be as sheltered from inheritance tax as they are today.
The overall value of your estate (including your pension) will become more important.
You may want to review how your pension fits into your wider plans.
It’s also worth noting:
Spouses and civil partners are still expected to be exempt from inheritance tax on inherited pension benefits.
Some benefits, such as certain dependent pensions or death-in-service benefits, are expected to remain outside the inheritance tax rules.
Scottish Friendly doesn’t provide advice. The information provided should help you decide if the plan is suitable for you and your family. If you’re not sure whether this plan is suitable, you should contact a professional adviser for advice. Please remember that a financial adviser will charge you for providing advice, but they will discuss the cost of this before you use their services.
A few simple steps to consider
You don’t need to have everything figured out, but a few small actions can make a big difference:
Check who you’ve named as beneficiaries on your pension plans
Review older policies, especially Section 32 plans
Make sure you understand any guarantees you have
Consider speaking to a financial adviser if you’re unsure
Find out more
GOV.UK – Tax on pension death benefits.
MoneyHelper – What happens to your pension when you die.
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