Death benefits

Pension schemes can pay a variety of benefits on death. The benefits that can be paid will typically depend on the type of plan held, the scheme rules or policy conditions that apply to that plan and whether the benefit is being paid from uncrystallised funds (funds from which benefits have yet to be taken) or crystallised funds (funds that you have already taken benefits from). You can find these in your policy conditions that you received when you took out your plan.

You can update your death benefit nomination online anytime by visiting online request form and selecting 'Customer' and the death benefit option from the dropdown.

You can also use our death benefit nomination paper form.

Changing your nomination will cancel any previous nomination you’ve made (and any later nomination you make will cancel the previous one). It may also be a good idea to review your nomination(s) from time to time, so it accurately reflects your wishes and takes into account any change in your circumstances.

Your pension fund will be held in one of the following types of scheme/contract:

• Occupational pension scheme (a scheme set up by an employer to provide retirement benefits for its employees)
• Buyout policy arising from an occupational pension scheme (also known as s32 buyouts or trustee-proposed buyouts)
• Additional voluntary contribution plan (which will have a direct link to an occupational pension scheme)
• Retirement annuity contract (also known as s226 policy)
• Personal pension
• Stakeholder pension

It’s important to know what type of plan you have as this will determine what options are available for death benefits. The death benefit options will be covered in the relevant scheme rules and policy conditions applicable to your plan but you can also check with your adviser (if you have one) or contact Aegon about the options that would be available. 

Generally, it’s possible for death benefits to be used for one or more of the following:

• Paid as a lump sum
• Allocated to a drawdown fund – this allows a beneficiary to keep money invested and take income as and when it’s needed.
• Used to buy an annuity – this provides a regular income for life or for a fixed number of years should you die within a chosen guaranteed term.

Not all of these options may be available from the plan you hold and the size of your pension pot may restrict the options offered. For example, it’s not common for drawdown to be available from occupational pension schemes or from older-style pension plans. Similarly, drawdown may not be available to minors (a person who is still legally a child) or beneficiaries who aren’t resident in the UK. Legislation and HM Revenue & Customs' guidance will determine whether these options will be tax-free (that is, if a lump sum, drawdown income or annuity payments will be paid tax-free) or whether they'll be subject to tax. Generally, the options will be tax-free if you die before age 75 and the benefits are settled within a two-year period from the date of notification of your death. If the benefits are settled outside of the two-year period or if you die on or after age 75, the benefits will be taxable.

It's also worth pointing out that the benefits paid will be tested against your Lump Sum Allowance and Lump Sum and Death Benefit Allowance if they're paid tax-free. To find out more, visit GOV.UK.

If funds are held in drawdown, it’s possible for death benefits to be used for one or more of the following:

• Paid as a lump sum
• Allocated to a drawdown fund
• Used to buy an annuity

A lump sum would be paid tax-free on your death before age 75 if it's settled within a two-year period from the date of notification of your death. If the lump sum was settled outside of the two-year period, it would be taxable. Any continuing drawdown income or annuity payments would be tax-free on your death before age 75 but would be taxable if you die on or after age 75. 

If you have an annuity in payment on your death, the annuity may have been set up to continue to be paid to another person or you may have a guaranteed term built into the annuity so that payments will be paid for a set number of years should you die within the chosen guaranteed term. Generally, the continuing payments would be tax-free if you die before age 75 but would be taxable if you die on or after age 75.

Again, this will depend on the type of plan you have and the scheme rules or policy conditions that apply to it.

If your plan is part of an occupational pension scheme, it’s the trustees that will deal with settling the death benefits. If a lump sum is payable from your plan, you may be able to notify the trustees who you'd like this to be paid to. The trustees would take your nomination into account when deciding who to pay the lump sum to but they are not legally bound to follow the nomination you have made. The final decision on who to award the lump sum to and how much to allocate to each beneficiary rests with them.

For personal pension and stakeholder plans, Aegon as your pension provider will deal with settling the death benefits. If a lump sum is payable from your plan, you may be able to notify Aegon who you'd like this to be paid to. Aegon would take your nomination into account when deciding who to pay the lump sum to but we're not legally bound to follow the nomination you've made. Lump sum payments can be made to a wide range of beneficiaries, who don’t necessarily have to be classed as your dependants, although scheme rules may restrict this to a narrower range of people.

If you have a buyout plan or retirement annuity, the policy conditions usually dictate that any lump sum would be paid to your estate, but it may be possible to put in place a separate trust under which the trustees will decide who will receive the death benefit.

Any nomination you make should be regularly reviewed to make sure it's updated if any of your circumstances change. Scheme trustees or a pension provider will always refer to the most recent nomination form that they've been given.

Where drawdown or an annuity is offered as an option on your death, the relevant scheme rules or policy conditions will set out who could be possible recipients of a drawdown fund or an annuity. For drawdown funds, it may be possible for you to make a nomination that Aegon can take into account in the event of your death. 

Where payment of a lump sum on death is at the discretion of a scheme administrator or trustees, the benefit will not normally be treated as part of your estate for inheritance tax purposes. However, inheritance tax is a complex area so you should speak to your adviser or take your own specialist advice if you’re concerned about any inheritance tax implications. 

In the October 2024 budget, the government announced plans to include most pension benefits within a person's estate for inheritance tax purposes from 6 April 2027.