Pensions occupy a unique position in UK estate planning: unlike most other assets, a SIPP generally sits outside the pension holder's estate for inheritance tax purposes, and can often be passed to loved ones in a way that's remarkably tax-efficient — provided a few important rules, particularly around age 75, are properly understood.
Why pensions sit outside the estate
Because a SIPP is technically held in trust by the pension scheme (rather than being an asset the individual directly owns in the way a house or bank account is), it generally does not form part of the estate when calculating Inheritance Tax. This is one of the more significant tax advantages of pension saving, and it's a key reason some retirees choose to draw income from other savings first and preserve pension funds for as long as possible, specifically because of the inheritance tax treatment. That said, the interaction between pensions and inheritance tax has been subject to policy change and proposed reform in recent years, so it's especially important to check current rules, since this is an area where the details can shift.
The crucial age-75 distinction
The tax treatment of SIPP death benefits depends heavily on whether the pension holder dies before or after reaching age 75.
| Death before age 75 | Death at or after age 75 |
|---|---|
| Beneficiaries can generally receive the pension funds entirely free of income tax, whether taken as a lump sum or via drawdown, provided it's within certain limits | Beneficiaries generally receive the funds, but any income they draw (or lump sum taken) is taxed as their own income at their marginal rate |
This distinction is significant. Dying before 75 currently allows for a genuinely tax-free pass of pension wealth to beneficiaries in many circumstances, while dying at or after 75 means the money is still passed on (and still generally outside the estate for inheritance tax purposes), but income tax becomes payable by the beneficiary as they draw on it.
Who can inherit a SIPP
Unlike some pension products of the past, a modern SIPP typically allows the holder to nominate a wide range of beneficiaries — not just a spouse, but children, other family members, friends, or even a trust or charity. This flexibility is one of the reasons SIPPs are often considered attractive from an estate planning perspective compared with some older, more restrictive pension arrangements.
The expression of wish
Because a SIPP is held in trust, the pension holder cannot simply dictate in their will who receives it — a will has no direct legal control over pension death benefits. Instead, the pension holder completes an "expression of wish" (sometimes called a "nomination form") with the pension provider, indicating who they would like the scheme's trustees or administrators to consider paying the death benefits to.
Why it's called an "expression of wish" and not a binding instruction
Technically, the scheme trustees or administrators retain final discretion over who actually receives the death benefits, taking the expression of wish into account alongside other relevant circumstances. In practice, providers follow a clearly and currently completed expression of wish in the vast majority of cases — but this discretionary structure is precisely why the pension can usually sit outside the estate for inheritance tax purposes, since it isn't a hard, contractual entitlement in the way an inherited bank account would be.
Why keeping it up to date matters
An expression of wish should be reviewed and updated after major life events — marriage, divorce, the birth of a child, a bereavement — since an outdated form naming a former partner, for example, could complicate or delay how death benefits are eventually distributed, even though the trustees retain final discretion.
Nominating multiple beneficiaries in different proportions
An expression of wish doesn't have to name a single beneficiary or split money equally. Many pension holders nominate several people — for example, a spouse and children — in specified percentages, and can update these proportions freely over time as family circumstances change, without any of the restrictions that apply to altering a will.
Nominating a trust as beneficiary
Some SIPP holders, particularly those with more complex family situations or specific concerns about how a young beneficiary might manage a large inherited sum, choose to nominate a trust rather than an individual directly. This is a more specialised area of estate planning, and typically benefits from professional advice given the legal and tax complexity involved in setting up and administering a trust correctly.
How beneficiaries can take the money
Depending on the scheme's rules and the beneficiary's own preference, inherited pension funds can typically be taken as:
- A single lump sum
- An ongoing "beneficiary's drawdown" arrangement, keeping the funds invested and drawing an income over time
- In some cases, used to purchase an annuity in the beneficiary's own name
The tax treatment (free of income tax if the original holder died before 75, or taxed as the beneficiary's income if after 75) generally applies regardless of which of these options the beneficiary chooses.
A worked example
Suppose a SIPP holder dies at age 68 with a pension pot of £400,000, having kept an up-to-date expression of wish naming their two adult children as equal beneficiaries. Because death occurred before age 75, each child could, in this hypothetical scenario, potentially receive their £200,000 share entirely free of income tax, whether taken as a lump sum or drawn down gradually over time — and because the pension sits outside the estate, this transfer would also generally not be subject to Inheritance Tax, unlike many other inherited assets.
Had the same SIPP holder instead died at age 78, the £400,000 would still generally pass to the beneficiaries outside the estate for Inheritance Tax purposes, but each child would pay income tax at their own marginal rate on any amount they draw from their inherited share, rather than receiving it tax-free.
Recent policy discussion around pensions and Inheritance Tax
The treatment of pensions for Inheritance Tax purposes has attracted significant policy attention in recent years, with proposals under discussion that could bring some unused pension funds within the scope of Inheritance Tax from a future date. Because this is an evolving area of tax policy rather than a settled, permanent feature of the rules, anyone relying heavily on the current outside-the-estate treatment as part of their financial or estate planning should check the latest position directly with current HMRC guidance, since a change here could meaningfully affect the attractiveness of preserving pension wealth for inheritance purposes relative to spending it, or using other assets, during retirement.
Practical steps for SIPP holders
- Complete an expression of wish with the SIPP provider as soon as the account is opened — this is often overlooked, especially by younger savers who don't feel death benefits are yet relevant to them.
- Review and update the expression of wish after any significant life event.
- Consider discussing pension death benefits as part of any wider estate planning, particularly given the potential inheritance tax advantages and ongoing policy discussion in this area.
- Check the specific scheme's rules on how beneficiaries can access inherited funds, since this can vary between providers.
Common mistakes to avoid
Never completing an expression of wish at all
Without any expression of wish on file, scheme trustees have to decide who receives the death benefits with far less guidance about the holder's actual wishes, which can lead to delays and outcomes that may not reflect what the holder would have preferred. This is a simple form that takes only a few minutes but is surprisingly often left blank, particularly by younger savers.
Assuming a will controls pension death benefits
Because a will has no direct authority over a SIPP's death benefits, someone who updates their will after a divorce but forgets to separately update their pension's expression of wish may inadvertently leave a former partner named as the intended pension beneficiary.
Forgetting to review the expression of wish across multiple pensions
Someone with a SIPP and one or more older workplace pensions needs to review and update the expression of wish separately with each provider, since updating one does not automatically update the others.
Frequently asked questions
Can a beneficiary who inherits a SIPP further nominate their own beneficiaries?
Yes — pension wealth can, in principle, pass down through multiple generations this way, with each beneficiary of an inherited pension able to complete their own expression of wish for what happens to any remaining funds after their own death, subject to the scheme's specific rules.
Does it matter which type of pension is used for estate planning purposes?
The general principle of sitting outside the estate for Inheritance Tax purposes, and the age-75 distinction, applies broadly across defined contribution pensions including SIPPs, though the specific flexibility around beneficiary nomination and how funds can be accessed can vary between older and more modern pension products, so checking the specific scheme's rules matters.
Key takeaways
- A SIPP generally sits outside the pension holder's estate for Inheritance Tax purposes, making it a valuable part of many estate plans.
- Death before age 75 generally allows death benefits to pass to beneficiaries free of income tax; death at or after 75 means beneficiaries pay income tax on withdrawals at their marginal rate.
- An expression of wish tells the scheme trustees who the holder would like to receive death benefits, though trustees formally retain final discretion.
- Beneficiaries can typically take inherited pension funds as a lump sum, via drawdown, or in some cases via an annuity.
- Keeping the expression of wish up to date after major life events helps ensure the pension holder's wishes are properly reflected.
- Pension and inheritance tax rules in this area have been subject to policy change, so always check current HMRC guidance.