The seven biggest retirement myths revealed

Pensions can be passed to your loved ones when you die, although from 2027 they will fall within the scope of inheritance tax for the first time.

Under current rules, if you have a defined contribution pension and you die before you retire, your pension will usually pass tax-free to the person you nominate when you first start paying into it.

If you don’t nominate anyone, the trustee of your pension fund can give it to anyone who is financially dependent on you, such as your children or your partner.

If you die after retirement but before the age of 75 and you withdraw income from your pension using flexible withdrawals or flexible access withdrawals at that time, your dependents can receive tax-free income from your pension. However, if you die when you are over 75, your pension will still be transferred tax-free, but your dependents will have to pay income tax on any income they receive from it, in the same way as you.

It is usually only if you have used your pension funds to purchase an annuity or lifetime income that your pension income stops when you die, although some annuities may continue to provide income for dependents.

Although each scheme is different and you should check the details of your current pension, if you have a defined benefit pension and die before retirement, your scheme may pay a tax-free lump sum that will usually be two or four times your salary. It can also provide what is known as a ‘survivor’s pension’ to your beneficiaries.

If you are retired and receiving income from your last pensionable salary when you die, usually part of your pension will be paid to your spouse and/or dependent children. You can find out more about this subject in our article What happens to my pension when I die?

However, from April 2027, unused defined contribution pension funds and death benefits owed from the pension will belong to a person for inheritance tax purposes. From now on, retirees may be more likely to withdraw their pension funds during their lifetime, rather than saving them for inheritance purposes. This may cause a shift in focus to other tax saving vehicles, such as ISAs. Find out more in our guide Pension budget changes 2024.