Draw It or Leave It? Your Pension After a Diagnosis

If you have been given a terminal diagnosis and are asking whether you should take your pension now or leave it for the family, the honest starting point is the opposite of most people's instinct. For most people with a defined contribution pension, leaving the pot with the scheme is usually the better decision, not drawing it. The urge to get hold of the money while you can is understandable, but drawing it often does the very thing you are trying to avoid: it shrinks what actually reaches the people you love.

The reason is simple, and it is worth understanding before you sign anything. A pension pot that stays inside the scheme normally sits outside your estate. It passes to the people you have nominated, at the scheme's discretion, and it has historically fallen outside inheritance tax. The moment you withdraw it, that cash lands in your bank account and becomes part of your estate, where it can be taxed, reached by creditors, counted against means-tested benefits, and shared out by your will or the intestacy rules rather than by your pension nomination.

This page is written for a short prognosis, not for ordinary retirement planning, and it deals mainly with defined contribution pensions, because that is where the choice actually exists. Defined benefit schemes work differently, and the tax rules on pensions and death are changing, so treat what follows as the shape of the decision rather than the final word for your exact scheme.

The short answer: leaving it usually protects more of it

A defined contribution pension is not part of your estate in the way your bank account is. It is held by trustees, and when you die they decide who receives it, guided by the expression of wish form you have completed. That discretion is exactly what keeps the money outside your estate for inheritance tax, and it is why a pension can reach a partner or child quickly, without waiting for probate and without being swallowed by debts owed at death.

Withdraw the pot, and every one of those protections falls away at once. The cash is now yours, sitting in an account in your sole name. It forms part of your estate. If you owe money when you die, that money can be used to pay it. If the estate is large enough to be taxable, the withdrawn cash counts towards it. And it no longer passes by your pension nomination; it passes by your will, or, if you have no valid will, by the intestacy rules, which may not send it where you intended.

So the default position, for someone who does not urgently need the cash to live on or to pay for care, is to leave the pot where it is and make sure the nomination is right. The money is not lost by leaving it. It is arguably safer there than anywhere else you could put it.

What "leave it" actually means for your family

If you leave a defined contribution pot with the scheme, on your death the trustees pay it to the beneficiaries you have nominated. They can usually take it as a lump sum, or keep it invested in their own beneficiary drawdown, or buy an annuity with it. That flexibility belongs to them, not to your estate, which is another reason the money stays out of the inheritance tax net.

The tax on what they receive has historically turned on your age at death. Where death occurred before age 75, a defined contribution pot could generally be paid to beneficiaries free of income tax, within the available allowances. Where death occurred at or after 75, beneficiaries have generally paid income tax at their own marginal rate on what they draw. Those are long-standing rules rather than figures I am inventing, but they are precisely the sort of thing that changes, so confirm the current treatment with your scheme rather than relying on what a relative remembers.

There is a further change coming that matters for exactly this decision. The government has announced that unused pension funds will be brought within inheritance tax from April 2027, which narrows the long-standing advantage of leaving a pot untouched. It does not reverse the basic logic overnight, but it is a reason to get current, scheme-specific guidance rather than acting on general rules. The free, government-backed service is MoneyHelper, which covers pensions and death benefits and will not try to sell you anything.

What "draw it" does to the money

Taking the pot, or a large chunk of it, feels like taking control. In practice it hands control to your estate, and your estate has more people with a claim on it than your pension does.

Three things happen when the money moves into your bank account. First, it becomes reachable by creditors: anything you owe at death is paid from the estate before your beneficiaries receive a penny. Second, it can become taxable on death if the estate is large enough, in a way the pension itself was not. Third, it is distributed by your will, so it will only reach the right person if your will is valid and current; if you die without one, it follows the intestacy rules, which can send it to relatives you never intended and can leave an unmarried partner with nothing.

There is also an income tax cost at the moment of withdrawal. Only part of a defined contribution pot is normally tax-free; the rest is taxed as income in the year you take it, and a large single withdrawal can push you into a higher tax band for that year. And if you or your household receive any means-tested benefits, a lump sum sitting in your account can reduce or end them, because it counts as capital. None of this makes drawing the money wrong in every case. It makes it a decision with consequences that the retirement-planning version of this question never has to weigh.

Defined benefit pensions work differently

Everything above assumes a defined contribution pension, the kind with a pot of money in your name. A defined benefit pension, sometimes called a final salary or career-average scheme, does not have a pot you can draw. It promises an income, and it sets out its own death benefits in the scheme rules.

Those benefits are typically a pension for a surviving spouse or civil partner, sometimes a reduced pension for a dependent child, and sometimes a lump sum, especially if you die before drawing the pension. The scheme rules decide who qualifies, which is why an unmarried partner can be left out of a defined benefit scheme even after decades together unless the scheme recognises them and you have told it who they are. If you are in this position, read our guide on why an expression of wish is not the same as a binding nomination, because the distinction decides whether the scheme must pay your partner or merely may.

Some defined benefit schemes also allow a member with a very short life expectancy to commute their pension for a one-off serious ill-health lump sum. Whether that is available, and whether it is a good idea, depends entirely on the scheme and on who would otherwise receive the survivor's pension. Ask the administrator for a written statement of exactly what would be paid on death, and what would change if you took a lump sum instead. Do not guess.

The serious ill-health lump sum

If a doctor confirms that you are expected to live less than a year, a defined contribution scheme can generally pay the whole pot to you as a serious ill-health lump sum. The tax treatment has again turned on whether you are under or over 75 at the time. This is the route people mean when they ask whether they can take the whole pot as cash because they are terminally ill, and the answer is often yes.

The harder question is whether you should. Taking the pot as a serious ill-health lump sum moves the entire amount into your estate in one step, with every consequence set out above: exposure to creditors, potential inheritance tax, distribution by your will, and an effect on means-tested benefits. If your reason for taking it is a concrete need, such as adapting your home, clearing a debt that is causing distress, or making sure your family has cash to live on now, that can be the right call. If the reason is simply to have the money out of the scheme, you may be dismantling the most tax-efficient thing you own for no gain.

A sensible middle path exists. You do not have to choose all or nothing. Drawing what you genuinely need, and leaving the rest in the scheme for your nominated beneficiaries, keeps the protection on the part you are not going to spend. Before you decide, it is worth reading how your choices here sit alongside the rest of putting your affairs in order in our guide to a terminal diagnosis and putting affairs in order.

Get the expression of wish right before anything else

Whatever you decide about drawing or leaving, one task matters more than the rest and takes twenty minutes: making sure your expression of wish form names the right people. This is the form that tells the trustees who should receive the pot on your death. It is not your will, and your will does not control it. A pot worth more than the house has, on occasion, gone to an ex-partner named on a form completed years earlier and never updated.

Check the form for every pension you hold, not just the largest, and confirm in writing that each scheme has recorded your current wishes. If you have married, remarried, separated or had children since you last looked, treat that as a certainty that a form needs changing; our guide on the nomination forms to change after a marriage lists the ones people most often miss. Do this now, while you have the capacity to sign it. Once capacity is gone, someone acting under a power of attorney cannot complete a fresh nomination on your behalf, so this is genuinely a task with a closing window.

Separately, this is a good moment for a partner in good health to look at their own protection, because the pension decisions here only cover one side of the household. If cover would help your family stay in their home or clear a debt that a pension will not, a healthy partner can get life insurance quotes and have an FCA-authorised broker price it against the real gap. It is also worth checking whether cover you already hold has quietly been overlooked; our guide on how to find out whether someone has life insurance walks through where to look.

Scotland and Northern Ireland

The pension tax rules are set across the UK, so the core comparison between drawing and leaving a pot is the same wherever you live. What differs is what happens to the money once it lands in your estate, because how an estate is divided is not uniform across the UK.

In Scotland this matters more than most people realise. Money left inside a pension is not part of your estate, so it is beyond the reach of Scottish legal rights. Draw it into your bank account, though, and it becomes part of your moveable estate, where a spouse, civil partner and children have legal rights that a will cannot override. In other words, taking the pot can expose it to claims that leaving it would have avoided entirely. We set out how this works in our guide on dying in Scotland, prior rights and debts. Northern Ireland has its own succession and estate rules again, distinct from those in England and Wales, so a withdrawn lump sum there is governed by Northern Irish law. In every part of the UK, the safest way to be sure is a written statement from your scheme and, if the estate is at all complex, advice from a solicitor.

Frequently asked questions

Is it better to take my pension or leave it?

For most people with a defined contribution pension and a short prognosis, leaving it is better. Money left in the pot is normally paid to your nominated beneficiaries at the scheme's discretion and has historically fallen outside your estate for inheritance tax. Money you withdraw sits in your bank account and becomes part of your estate, where it can be taxed, reached by creditors and distributed by your will. On a short prognosis, that difference usually matters more than the income tax rate on the withdrawal itself.

What happens to my pension pot when I die?

A defined contribution pot is paid to whoever the scheme decides, guided by your expression of wish form, which is why keeping that form current is so important. The tax treatment has depended on whether death occurs before or after age 75. The rules on pensions and death are changing, including a planned move to bring unused pension funds within inheritance tax, so confirm the current position with your scheme rather than relying on general advice.

Should I take the whole pot as cash?

Rarely, without guidance. A large withdrawal can push you into a higher tax band, affect means-tested benefits, and move money into your estate where it may be taxable on death and reachable by creditors. If you have a concrete need for the cash, taking part of it can be right; taking all of it simply to hold it usually is not. MoneyHelper offers free guidance, and Pension Wise appointments are available from age 50.