What happens to pension policies and life assurance policies the deceased held at death?

Updated on 16 May 2020

When a person dies they may be already receiving a regular pension or may be receiving irregular payments via a drawdown mechanism. Alternatively, they might not have started to draw a pension yet although they (and an employer) may have contributed to a pension scheme for them in the past. This page explains what may happen to those pension funds now. You may find it useful to refer to the Pensions jargon buster as some of the terms used are specific to this topic. 

This is a very complex area and the notes below refer only to registered UK pension schemes where the lifetime allowance has not been exceeded. It also assumes any lump sum death benefits are paid within two years of death. The rules have changed significantly over the years, but this page describes the regime from April 2016. 

Life assurance policies held by the deceased may also make a payment and we consider the taxation implications below. 

the word pension on a money bag
(c) Shutterstock / Andrii Yalanskyi

My spouse or civil partner was receiving the state pension before they died. Is it paid to me now?

No, but your own entitlement to the state pension may change. You can read about this on the page Death of a spouse or civil partner.

The deceased had deferred their state pension before they died. What happens to it now?

Assuming the deceased had not already made a claim to the state pension before they died, if there is no surviving spouse or civil partner, then no lump sum is payable. However, the personal representatives may be able to claim up to three months’ worth of pension, that would form part of the deceased’s estate.

On the other hand, if there is a surviving spouse or civil partner, they can inherit some of the pension entitlement but not before they reach state retirement age – and only if they do not remarry or enter a new civil partnership before they reach state retirement age. You can read about the different possibilities on GOV.UK.

The deceased was receiving another type of pension before they died. What happens now?

You need to advise the pension payer of the death. It then depends on the type of pension scheme as to whether any further funds might be paid from the pension scheme. The tax considerations around such pension funds are complex, but the outcome often depends on action taken (or not taken) by the deceased while they were alive. Each pension scheme may have its own rules and so the guidance below cannot cover every eventuality.

An annuity was being paid

Normally this ceases at the date of death, but it is possible that there may be some entitlement for the bereaved spouse or civil partner to receive a survivor’s pension or for some value to be paid to other beneficiaries named by the deceased at the time the annuity was set up. Any guaranteed sums payable (for example, that the annuity would be payable for a period of five years) are potentially subject to inheritance tax, if the estate as a whole has sufficient value.

Any annuity payments made as income to beneficiaries will be tax-free income if the deceased was aged under 75 when they died, but taxable at normal income tax rates if the deceased was aged 75 or over at the time of their death.

A workplace pension was being paid from a defined benefit scheme

Often these schemes will allow a pension to be paid to a bereaved spouse or civil partner and/or a dependant’s pension (for example to a child of the deceased). After a pension has started to be paid to the deceased from the scheme, any pension paid to a bereaved spouse or other dependant will be liable to income tax.

A pension was being paid from a money purchase arrangement

The balance of funds held in the arrangement are available.

Any sum paid out may be liable to income tax at the recipient’s marginal tax rate(s), depending on the age at which the deceased died.

If they died under the age of 75, the following payments may be made tax-free:

  • a lump sum to the beneficiary; or
  • a lump sum paid into a beneficiary’s own pension fund (subject to the normal limits); or
  • income might be drawn by the beneficiary from the fund tax-free.

If they died at age 75 or over, any payments to a beneficiary are liable to income tax at the beneficiary’s marginal rate of tax. But the fund may be kept within the fund’s tax-free pension fund environment before it is needed.

The deceased had paid into a pension scheme at the time of death but had not yet started drawing a pension. What happens now?

It depends on both the type of scheme and whether the deceased was an active member of the scheme.

The deceased was an active member of a defined benefit scheme

Normally a lump sum death benefit will be paid along with a return of the member’s contributions. These should be tax-free if the deceased was under age 75.

In addition, a pension may become payable to the deceased’s spouse or civil partner or other dependant. Such pensions are taxable.

The deceased was a deferred member of a defined benefit scheme

The scheme may make a refund of contributions paid (tax-free) and/or pay a pension to the bereaved spouse or civil partner and/ or to dependants. Such pensions are taxable.

The deceased was an active member of a defined contribution scheme

The scheme may pay a lump sum death benefit and/or a pension to dependants. If the deceased was aged under 75, any lump sum and/or pension would be paid tax-free. If the deceased was age 75 or over, any death benefits or pension would be taxable on the beneficiary.

The deceased was a deferred member of a defined contribution scheme

The options are the same as if the deceased was an active member of the scheme.

Who gets any pension lump sum death benefit?

Pension scheme trustees often have wide discretion as to who they choose to pay benefits to, although normally they would act in accordance with the deceased’s wishes if they had been made aware of them. If death benefits are paid at the discretion of the pension scheme trustees, they normally fall outside the estate for inheritance tax purposes and so the executor or personal representative does not have to deal with them.

The deceased had a life assurance policy that will pay out. Is the lump sum taxable?

This is a complex area and it is important to find exactly what type of policy it is and whether it is written in trust. Both the income tax and the inheritance tax issues associated with such policies can be difficult to work out and we suggest referring to HMRC’s Inheritance tax manual and/or taking professional advice. See Where can I get more help? below.

The deceased owned a life insurance bond – an investment bond. Is the lump sum taxable?

You can read about the income tax implications of this in our pensioners section. As noted above, the inheritance tax issues associated with such policies can be difficult to work out and we suggest referring to HMRC’s Inheritance tax manual and/or taking professional advice from a tax adviser or a member of the Society of Trust and Estate Practitioners.

Where can I get more help?

If you want more information on any of the following areas, you can find it elsewhere on this website:

  • tax basics: information on tax allowances, tax rates and how to claim tax back;
  • pensioners: tax on, and during, retirement;
  • bereavement: tax issues arising on death for the deceased, their estate and surviving family;
  • tax credits and benefits: help to ensure you receive the appropriate credits and benefits;

The Pensions Advisory Service offers free information and guidance on its website.

The Trustees or scheme administrator of the pension scheme of which the deceased was a member should be able to provide you with details of how their scheme operates.

If you are unsure of whether the deceased was a member of a pension scheme at date of death, their paperwork may help you identify any pension contributions and/or any pension receipts.

The Money Advice Service offers basic information on life assurance products and investment bonds.

Throughout this site we only offer general guidance on tax topics and you should always obtain specific advice before taking any action. You can find out where to get specialist help on our Getting help with bereavement and inheritance tax page.