Building a balanced portfolio

Building a balanced investment portfolio is key to smoothing out the ups and downs of the stock market, and ensuring that your long-term goals stay on track. Quick reminder: your portfolio (in investing terms) refers to all the different investment assets you own — stocks, bonds, ETFs, commodities etc. 

Spreading your investments between different assets can help mitigate against overexposure, if the price of a particular asset class suffers a downturn. 

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Focus on your financial goals first

Grounding your investment choices in your goals is a great way to get the most out of your portfolio. Whatever you’re investing in, it’s good to have an idea of why you chose a particular investment and what purpose it serves. 

Investing is best suited to those long-term goals, the outdoor office, that pricey furniture making course, Wimbledon final tickets, turning those big spends that feel out of reach now into your new standard of living. 

A balanced portfolio aims to give investors steadier, long-term growth, as mitigating risk between different assets has historically provided positive returns over a longer period of time. 

See our guide on retirement and long-term investing. You can track your goals and seamlessly link them to an investing account in the Chip app. 

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Assessing your investing risk tolerance

Determining your risk tolerance is key to balancing your portfolio. If you have a longer time horizon to invest, you may be able to tolerate some more risk, as historically markets have always trended upwards over time. 

If you’re approaching retirement, your risk tolerance may be lower as you get closer to your target date.

Some investors choose to allocate a greater portion of lower-risk assets like bonds or cash equivalents, with the aim of preserving capital.

On the other hand, those with more than ten years to stay invested, may take more risk; aiming for greater long-term growth despite short-term volatility.

The right balance depends on your comfort with potential losses, your financial situation, and how long you plan to keep your money in the market.

See our guide on risk, return and investing strategies for a deeper dive.

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Understanding asset allocation

Asset allocation is simply how you split your investments between different types of assets — like stocks, bonds, property, or commodities. Each type behaves differently over time.

• Stocks can offer higher growth potential, but also come with bigger price swings.
  
• Bonds usually provide lower, steadier returns and can act as a buffer during market downturns.
  
• Cash equivalents (like savings accounts) are the safest, but offer the lowest returns.‍
• Alternative assets (like gold or real estate) can add extra diversification.
  

Your mix of these assets should reflect both your goals and your risk tolerance. Someone with decades before retirement might have a higher proportion of stocks, while someone nearing retirement might hold more bonds and cash.

See our guide on asset classes for more details.

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Diversification

Diversification means not putting all your eggs in one basket. By spreading investments across different asset types, industries, and countries, you reduce the impact of poor performing funds dragging down your whole portfolio.

For example, if tech stocks are having a bad year, gains from bonds or commodities could help cushion the blow. A well-diversified portfolio aims to smooth out returns and make the ride less bumpy over the long term.

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Rebalance your portfolio regularly

Over time, some investments will grow faster than others, changing your original asset allocation. This “drift” can increase your risk without you realising it.

Rebalancing means checking your portfolio regularly, every six months or so, and moving money between assets to get back to your target allocation. It’s like course-correcting on a long journey to make sure you stay headed towards your goals. 

We have a whole series dedicated to various investment strategies that can help you stay on track.

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How to build a balanced portfolio summary

Balancing your portfolio starts with knowing your goals, understanding your risk tolerance, and picking an asset allocation that fits both. From there, diversifying and rebalancing are key to managing risk and keeping your plan on track.

Next up in this series: What is asset allocation and why it matters.

The 2025/26 tax year ends at midnight on 5 April 2026 and your annual ISA allowance will reset for a new tax year.

If you have any ISA allowance remaining (you can check this in your app) and want to make a deposit within the 2025/26 tax year, here’s the deadlines you need to know.

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Deposit before:

• 23:00 on Tuesday 31 March 2026 — Stocks & Shares ISA

• 23:00 on Thursday 2 April 2026 — Smart Cash ISA  

Deposits that successfully make it into your Chip ISAs before these deadlines will count towards your 2025/2026 ISA allowance.

Any further deposits into your Cash ISA beyond these deadlines, may still successfully land in your balance, but we can’t guarantee it. Successful deposits made before 23:59 on Sunday 5 April will count towards your 2025/2026 ISA allowance.

But please note that there can be unexpected delays, often caused by banks limiting deposits out and circumstances outside of our control. Your deposit is only valid when it reaches our banking partner—see more below.  

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Next year will be the last year you can use your full allowance in cash

In the 2025 Autumn budget the government announced that 2026/27 will be the last year where you put your full £20,000 annual ISA allowance into cash.

From April 2027 onwards you will only be able to put £12,000 of your total £20,000 annual allowance into cash (unless you’re over 65).

So, bear in mind if you do like to put your full allowance into cash, you’ve only got one more year to fill it up.

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Best ways to deposit

Our most popular option for transferring into your ISA is through connected bank transfer. Simply follow the instructions in the app to connect to your provider.

You can also make a manual bank transfer into your Cash ISA, which is best used for making deposits over £5,000.

In most cases, for both of these methods, your money arrives in seconds, but it can take up to two hours.

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Looking to transfer from another ISA?

You can easily transfer an ISA from another provider into Chip’s Cash or Stocks & Shares ISA.

Transfers don’t affect your annual £20,000 ISA allowance, as your allowance applies to new money only, so you don’t need to factor this in regard to the end of the tax year. You’re free to initiate a transfer anytime you like.

Make sure you check our list of approved Cash ISA providers we accept transfers from.

Unfortunately, we are unable to accept transfers from providers not on this list at the moment, but we are adding more all the time.

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Having trouble depositing?

If this is your first ISA deposit, we’ve found our members have the most success making a first deposit of less than £1,000.

Keep in mind that your bank may limit daily transactions on transferring money from your current account to your ISA.

These limits can vary drastically between providers, so check with your bank if you’re looking to move larger amounts.

You may have also set your personal limits on daily transfers, so adjust these accordingly if you haven’t already.

There may also be additional security checks on larger transactions, so factor this in and try and plan ahead.

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“I’m lost, what’s an ISA?”

ISAs are tax-efficient savings and investment accounts that offer tax-efficient exemptions on interest and returns earned within the account.

However, you are limited to depositing £20,000 within a given tax year (which runs April to April). This is your ‘annual ISA allowance’ and it is available on a use it or lose it basis.

You can learn more about ISAs in our quick guide here.

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It’s simple with Chip

Navigating ISAs is easy with Chip. You can have a Cash ISA, Stocks & Shares ISA or both; all accessible in one easy-to-use app.

Our flexible Smart Cash ISA allows you to make unlimited withdrawals and deposits without affecting your £20,000 allowance. Providing penalty-free access to your funds, whenever you need them, with all the tax advantages.

Our Stocks & Shares ISA allows you to effortlessly set up recurring deposits, which are then invested directly into the funds you've selected. This ensures your money is consistently working for you in your chosen investments to build wealth tax-free.

Interest rates and inflation are closely linked in the UK economy. Inflation, measured by the Consumer Price Index (CPI) and the Retail Price Index (RPI), is the rate at which the prices of services and goods are rising.

The Bank of England (BoE) is responsible for setting the base rate to help control inflation and maintain price stability.

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What Causes Inflation?

When the BoE raises interest rates, borrowing becomes more expensive. This can slow down economic growth and curb inflation. This is because higher interest rates make it more expensive for businesses to borrow money, which leads to slower growth and fewer job opportunities. 

Consumers also have less money to spend because they are paying more interest on loans and mortgages. As a result, demand for goods and services decreases, which can lead to lower prices.

On the other hand, when the BoE lowers interest rates, borrowing becomes cheaper. This can help stimulate economic growth and fuel inflation. When interest rates become lower, it makes it cheaper for businesses to borrow money, which can lead to more investment and create more jobs. 

Consumers also have more money to spend because they are paying less on loans and mortgages. This means the demand for goods and services increases, which can lead to higher prices. 

Learn more about interest rates here.

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How Does the Bank of England Control Inflation and Interest Rates?

The Bank of England uses monetary policy to control inflation and interest rates. The bank sets interest rates, which influence the cost of borrowing and the rate of growth in the money supply.

• When inflation is too high, the bank raises interest rates to reduce spending and slow down the economy.
• When inflation is too low, the bank lowers interest rates to encourage spending and growth.

The bank also uses other tools, such as quantitative easing, to influence the money supply and control inflation.

Quantitative easing (QE) is a monetary policy used by central banks to stimulate the economy by increasing the money supply and lowering interest rates.

This is typically done by purchasing government bonds or other financial assets from banks, which increases the banks' reserves and makes it easier for them to lend money.

The goal of QE is to encourage spending and investment, which can help boost economic growth and reduce unemployment.

This can help to stimulate economic growth and curb inflation by making it cheaper for businesses and consumers to borrow money.

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What You Need To Remember

When interest rates are high, borrowing becomes more expensive and can slow down economic growth whilst curbing inflation. When interest rates are low, borrowing becomes cheaper and can stimulate economic growth. 

Learn more about how our instant access savings account.

What are fractional shares?

A fractional share is exactly what it sounds like — a portion of a full share of stock or an ETF.

Instead of needing the full amount to purchase a whole share (which can sometimes cost hundreds or even thousands of pounds), fractional shares allow you to invest an amount that fits your budget, whether that’s £10, £100, or more.

• For example, if a single share of a company costs £200 and you invest £20, you would own 0.1 of a share.

Fractional investing is made possible by modern brokerage platforms, and it’s especially popular among new investors or those looking to spread small amounts across many companies or funds.

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Understanding types of fractional shares

Not all fractional shares are created equally. Here's a breakdown of the main types you might come across:

• Voluntary fractional shares: These are intentionally created when investors choose to buy a specific monetary value rather than a number of whole shares. Most common in retail investing today.
• Involuntary fractional shares: These occur due to events like stock splits, dividend reinvestment plans (DRIPs), or mergers and acquisitions.‍
• Fractional shares via ETFs and funds: Some exchange-traded funds (ETFs) and index funds inherently involve fractional share ownership behind the scenes, allowing for diversified exposure even with small investments.

Understanding the source of your fractional shares can influence how they’re treated in terms of ownership, voting rights, and dividend payouts.

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How does trading fractional shares work?

When you trade fractional shares, you're typically placing an order based on a cash amount, not the number of shares. 

Your investment platform calculates how much of a share that amount will buy based on the current market price.

A few important things to note for UK investors:

• Execution timing: Some providers batch fractional share orders and execute them at specific times during the day, rather than instantly.
• Ownership model: In most cases, you don’t directly own the share certificate. Instead, your platform holds it on your behalf, often via a nominee account.
• Fees and spreads: Be aware of how fees and bid-ask spreads may affect your investment, especially with smaller sums.

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Example of fractional shares

Let’s say you’re interested in investing in a company or ETF and shares are trading at £500 each. Rather than saving up to buy a whole share, you decide to invest £50. You now own 0.10 of a share.

If the share price increases by 10% to £550, your investment would be worth £55, a £5 gain, reflecting the same percentage growth.

This ability to invest smaller amounts can be particularly helpful when building a diversified portfolio across different sectors and asset types.

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Fractional shares and dividends

If the fractional shares you own pay a dividend, you’re typically entitled to a proportional dividend.

For example, if a company pays a £2 dividend per share and you own 0.5 of a share, you would receive £1 in dividends. However, how and when these dividends are distributed can vary by provider. 

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Pros & cons of fractional shares

Fractional shares advantages:

• Lower barrier to entry: Start investing with small amounts of money.
• Diversification: Spread your funds across more assets, reducing risk.‍
• Accessibility: Invest in high-priced shares that would otherwise be out of reach.

Fractional shares disadvantages:

• Limited voting rights: Some platforms do not extend shareholder voting rights to fractional holders.
• Trading limitations: Selling may be restricted or delayed depending on the provider, and you may not receive the price you expect.
• Platform dependency: You typically cannot transfer fractional shares between platforms or brokers.

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Are fractional shares safe and regulated?

Yes, when offered by FCA-regulated platforms, fractional shares are considered a safe and legitimate way to invest.

However, investors should understand that the underlying risks of market investing remain the same, your investment value can go up or down.

As with any investment, due diligence is key. Make sure to check whether your provider is covered under the Financial Services Compensation Scheme (FSCS) and understand how your assets are held.

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Fractional shares summary

Fractional shares have opened the door for more people to begin investing, regardless of how much capital they have to start with. 

By making it possible to own a piece of high-priced stocks or ETFs and diversify with less money, they represent a meaningful shift in how modern portfolios are built, especially for new or budget-conscious investors.

That said, it's important to understand the mechanics, limitations, and regulatory environment that surround fractional investing.

While they offer flexibility, they're not a guarantee of returns and carry the same risks as full-share investing.

In recent years, the rise of financial technology, or fintech, has dramatically reshaped how people manage, save, and invest their money.

From user-friendly mobile apps to AI-driven investment platforms, technology is removing many of the traditional barriers to entry in the world of finance.

In the next guide, we’ll explore how fintech is reshaping the future of investing, and what it means for everyday investors.

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Direct investment into individual bonds is not available via the Chip platform. Chip offers investment funds that invest in different assets as a collective investment.

The big money on Wall Street is changing its tune. According to the latest Bank of America Global Fund Manager Survey¹, professional investors are the most optimistic on global equities investing they’ve been since February, snapping up stocks at a rate not seen in seven months.

So, what's behind this sudden surge of optimism?

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Two big fears have faded

Previous months’ data has reflected fears in the market of a global recession triggered by a trade war, and central banks hiking interest rates to tackle inflation. September’s data shows that fund managers believe the worst of both threats is now in the rearview mirror.

1. Fears of a trade war are rapidly diminishing. This has caused the biggest one-month jump in global growth expectations in nearly a year.
2. Investors are now betting heavily on the Federal Reserve starting to cut interest rates. With inflation concerns easing, 47% of managers expect the Fed to cut rates four or more times in the coming year. Cheaper borrowing costs tend to boost stock market growth, and managers are positioning their portfolios accordingly.

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So, what are they buying?

The survey shows that cash levels remain low, meaning these giant funds are holding back less of a safety net for unforeseen changes. 

The destination for much of this cash is the "Magnificent 7" — the huge US tech firms like Apple, Microsoft, and NVIDIA that have become household names. It's a powerful vote of confidence in the biggest growth drivers of the global economy.

Managers are backing AI with 48% of respondents thinking “AI stocks are not in a bubble” and 50% said “AI is already increasing productivity”. 

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How you can get involved with Chip

Investing with Chip gives you access to a curated range of investment funds. These funds give you access to a basket of assets, including the global and tech stocks mentioned here — but you won’t need to pick the winners. Funds like the S&P 500, NASDAQ 100, and FTSE All-World track the price of hundreds of companies, with the “Magnificent 7” stocks currently leading these indexes. 

Start investing from £1. Open a Stocks & Shares ISA or General Investment Account, and you can get started in a few simple steps!

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Sources

¹TradingView

What is a private pension? 

A private pension is a pension you build yourself, separate from your workplace pension. tIn most cases only you contribute, though limited company directors can also receive employer contributions from their own company."  Either way, you’ll still receive tax relief on qualifying contributions and you decide how much to pay in and where the money is invested.

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The main types of private pensions

‘Private’ or ‘personal’ pension is often used as a blanket term for all of these options, there are actually three distinct types of pension ‘wrappers’. They all offer the same tax-relief, they differ in fees, investment choice and flexibility.

What is a personal pension?

Sometimes called a standard personal pension, this is the most common off-the-shelf option offered by large providers such as Aviva, Royal London etc. 

• You pay into a pot which is invested in a range of funds managed by the provider. 
• It’s a straightforward option for those who want a hands-off approach, as the provider handles your investments based on your risk profile.
• You’ll have less control and a narrower choice of investments compared to a Self-Invested Personal Pension (SIPP).

What is a stakeholder pension?

A stakeholder pension is a specific type of personal pension that has to meet strict government rules around fairness and accessibility.

• Providers can charge a maximum of 1.5% (drops to 1% after 10 years), and they must accept low minimum contributions (£20). 
• They are a popular choice for people on lower incomes or those who need to stop and start payments frequently without penalties.

What is a SIPP?

We’ve already covered the Self-Invested Personal Pension, but here’s a quick reminder in the context of other private pensions. 

This is the ‘DIY’ version of a personal pension, where you can select your investments yourself and have full control over your investment decisions. You typically aren’t limited to a standardised set of investment options, you can choose what works for you, and keep full oversight.

What is a junior SIPP?

A junior SIPP is a tax-efficient way to save for a child’s retirement. A parent or guardian can open the account, but the money belongs to the child.

You can pay up to £2,880 a year into the account. The government adds tax relief of £720 to this bringing the total to £3,600. The child cannot access the money until they reach age 55 (rising to 57 in 2028). 

What is a Lifetime ISA? 

A Lifetime ISA (LISA) is not technically a pension, but it is often used as an alternative for self-employed people. 

• You can save or invest up to £4,000 a year, and the government adds a 25% bonus (up to £1,000 free). 
• You must open a LISA before your 40th birthday, and can only continue making contributions until age 50. 
• You can withdraw the money tax-free after age 60. If you take it out earlier (unless buying a first home), you pay a 25% penalty. Note that the 25% penalty claws back more than just the government bonus — on a £100 contribution you'd receive £125 with the bonus added, but the penalty takes £31.25, leaving you with just £93.75. You effectively lose a small portion of your own money, not just the bonus. 
• Pension vs LISA: A pension is often preferred by higher-rate taxpayers (because you get 40% relief), while a LISA can be excellent for basic-rate taxpayers who want tax-free access at 60.

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Private pensions for the self-employed

If you’re self-employed your income may fluctuate, and pension saving can seem daunting if you’re unable to commit to a fixed monthly Direct Debit. A SIPP can give you:

• Flexibility to adjust contributions to your pension. You can pay in lump sums when you have a good month, and pay nothing if you need to take a break.
• Full transparency and low fees make SIPPs a good option if you aren’t ready to invest immediately.

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Private pensions for a limited company director

If you run your own limited company, a good way to save is actually through employer contributions:

• Instead of paying yourself a salary (which is taxed) and then paying into a pension, your company pays directly into your pension.
• This counts as an allowable business expense. Your company saves Corporation Tax on the contribution, and you pay no Income Tax or National Insurance on the money entering your pot. 

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What age can I draw my private pension? 

Private pots are designed to support you in later life, so the government has set rules for when you can start withdrawing the money from your pension.

• Under current rules you can access your pension from age 55.
• From 6 April 2028, the minimum pension age will rise to 57.

This applies to almost all private pensions (SIPPs, stakeholder and personal). The main common exceptions are if you are unable to work due to serious ill health, in which case you may be able to access it earlier.

Also, if you joined certain pension schemes before 3 November 2021, you may have a 'protected pension age' allowing you to access that pension from 55 even after the 2028 change. 

Read our full guide on retirement ages.

From 1 December 2025, the Financial Services Compensation Scheme (FSCS) guarantee limit for savings is increasing from £85,000 to £120,000 per person, per bank.

The FSCS guarantee for investments is not changing and is remaining at £85,000.

You do not need to do anything to benefit from this change, it will be applied automatically by the FSCS.

We will update our content and materials shortly after 1 December 2025 to reflect the new limits.

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What does this mean for my money held in Chip?

The FSCS guarantee for savings is managed by the Bank of England and FSCS agency directly and they have stated the new limit will be in effect from 1 December 2025.

So, from then on, in the unlikely event that Chip, or our partners (ClearBank for savings and Seccl Custody Ltd.) should fail, you will be covered up to:

• £120,000 of eligible deposits in your savings accounts, and;
• £85,000 of eligible deposits in your investment accounts.

You can read more about how your money is protected at Chip here: https://getchip.uk/how-we-protect-your-money

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Your savings accounts

Four of Chip’s savings accounts are provided by our partner bank, ClearBank.

This means your FSCS cover across all savings you hold in Chip is £120,000 in total across all accounts from 1 December 2025. Please note, FSCS cover applies per person, per bank, so if you hold other accounts powered by ClearBank outside of Chip, your cover will also be shared across them.

You can hold larger deposits than the FSCS protection cover amount. Chip savings accounts balance limits are currently:

• Chip Cash ISA: unlimited, but new deposits capped at £20,000 per tax year depending on your individual circumstances and subject to change in the future
• Instant Access Account: £1 million
• Easy Access Account: £1 million
• Prize Savings Account: £85,000

You can read more about how ClearBank protects your money here. Please note that the Chip Cash ISA isn't available for new customers.

For the Smart Cash ISA: Money deposited into the Smart Cash ISA is held across established UK licensed banks, such as Barclays, Lloyds and HSBC and is eligible for cover by the Financial Services Compensation Scheme (FSCS), subject to FSCS conditions.FSCS limits of £120,000 per person, per bank apply, subject to eligibility. As funds may be held across multiple UK licensed banks, protection applies separately to deposits held with each bank.

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Your Chip investment accounts

The money in Chip investment accounts sits with a different firm (Seccl Custody Ltd.) than our savings accounts, so you enjoy separate FSCS cover for this money.

Your FSCS cover for investments is unchanged by this news and remains up to £85,000 of eligible deposits across all your investment accounts in Chip, so if you have both a Stocks & Shares ISA, and a General Investment Account (GIA) open, your cover is spread across both of those accounts.

As with savings, FSCS cover for investments applies per person, per institution, so if you hold investment accounts with Seccl Custody Ltd. outside of Chip, your total cover of £85,000 will also be spread across those.

You can hold more than the FSCS protection limit in Chip investment accounts. The total balance limits per account are currently:

• Stocks & Shares ISA: unlimited, but new deposits capped at £20,000 per tax year depending on your individual circumstances and subject to change in the future
• General Investment Account (GIA): unlimited

Remember, FSCS doesn’t cover you for investment performance, or in the event that your investments go down and you get back less than you put in.

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The savings FSCS limit increase comes into effect on 1 December 2025

The new £120,000 FSCS limit comes into effect on 1 December 2025.

You don’t need to do anything to benefit from this change, it will automatically be applied by the FSCS.

The Bank of England has set financial firms a deadline of May 2026 to update all their content, marketing materials and disclaimers to reflect the new limit.

However, we aim to update all of our content across our app, website, documents and automated emails as close as possible to 1 December 2025.

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The details

On midnight 18 November 2025 the Prudential Regulation Authority (PRA) from the Bank of England (BoE) announced the FSCS limit will increase from £85,000 to £120,000 from 1 December 2025.

The PRA is responsible for oversight of FSCS protection in respect of deposits for banks.

The PRA does not govern FSCS limits for investment accounts, which are determined by the FCA and there have been no announcements from the FCA about increasing the limits for investments.  

If this changes, we will also update you.

Every month, the Office for National Statistics (ONS) releases the latest figures on the UK labour market from its Labour Force Survey (LFS). While this data is obviously important news for job seekers and politicians, it is also one of the most closely watched days in the calendar for investors. 

The Unemployment Rate represents the percentage of the labour force that is without a job but is actively seeking work. It’s important to note that this figure doesn’t include everyone who isn’t working. Students, retirees, and those not looking for a job are classified as ‘economically inactive’. 

When investors are interpreting unemployment figures, they’re typically looking for three things:

1. The headline rate: Is this figure going up and down? 
2. Wage growth: Are pay packets getting bigger?
3. Vacancies: Are companies trying to hire?

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Why do investors care?

For investors, employment data is a key economic health indicator and can be a key catalyst for other key indicators. It can have a direct effect on interest rates, consumer spending and inflation. 

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The link to interest rates

This is the biggest reason the markets care about jobs data. Unemployment is a key data point for the Bank of England Monetary Policy Committee when determining their base rate of interest, which determines the cost of borrowing for other banks. 

If unemployment is low: businesses are in greater competition over staff, pushing wages higher. When wages increase, so does consumer spending, and inflation can follow suit. The Bank of England may raise interest rates to stop the economy from ‘overheating’. Higher rates are tougher on borrowers, and cause markets to dip as debt becomes more expensive. 

If unemployment rises: this suggests a potential slow down in the economy, and the Bank of England may cut interest rates to try and stimulate growth. Lower rates are often welcomed by markets and investors, as they make borrowing cheaper and encourage spending.

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The link to corporate profits

The UK economy is heavily driven by consumer spending, and this has strong links to employment.

When jobs are safe (low unemployment): People buy cars, book holidays and subscribe to services. This pushes profits up for consumer goods and services companies like airlines, high-street shops and restaurants.

When jobs are at risk (high unemployment): Consumers tighten their fists and generally stick more to essential spending. In this environment, consumer essentials suppliers like supermarkets and utilities tend to show more resilience, whilst higher end discretionary spending like luxury goods and leisure suffer.    

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The ‘good news is bad news’ conundrum

Drawing a clear link between job growth and a robust economy can be tricky, and the stock market's reaction to positive employment data is not always consistent. 

This often happens due to inflation fears. If the job market is doing ‘too well’, investors’ inflation fears deepen, and predictions of Bank of England rate increases can dampen market spirits. Markets prefer a stable number that shows a strong economy, without being so strong inflation fears creep in. 

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Read our full guide on economic indicators investors should watch out for.

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Pension death benefit rules  

The tax rules for passing on a pension depend almost entirely on the age at which you die.

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Before age 75

If you die before age 75, your remaining pension pot can usually be passed to your beneficiaries tax-free.

• Beneficiaries can usually choose to take the money as a single lump sum or as a flexible income stream.
• Currently they won’t pay Income Tax on the money they withdraw, regardless of earnings.

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After age 75

If you die after age 75, your pension can still be passed on, but it is no longer tax-free.

• Your beneficiaries will pay Income Tax on any money they withdraw.
• This money is included in your beneficiaries earnings for the year and taxed at their marginal rate.

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Pension death benefit 2 year rule 

The ‘2-year rule’ states that for death benefits to be paid tax-free (when dying before 75), the pension provider must pay the funds (or designate them to a beneficiary’s drawdown account) within two years of being notified of the death.

If the provider takes longer than two years to settle the funds, the money becomes taxable even if you died before age 75. 

Important to note:

• Beneficiaries should notify the provider promptly of the death to preserve the tax-free status of pots (where death was before 75). 
• Tax-free lump sums are limited by the Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100. This is a limit on the total tax-free lump sums paid out across life AND death. 

If a spouse, civil or cohabiting partner passes away, separate Bereavement Support Payments are available, provided the bereaved meets certain eligibility criteria.

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Pension beneficiaries  

Because pensions are held in a trust, the pension provider’s trustees have the final legal say on who receives the money. They are not legally bound by your Will.

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Expression of wish form  

An Expression of Wish (or Nomination of Beneficiaries) form is a document that tells your pension provider who you would like to receive your pension when you die.

• While the provider’s trustees ultimately have discretion, they will almost always follow your latest Expression of Wish.
• If you forget to update this form, for example, following a marriage or divorce, the trustees may pay this money to an ex-partner, as that is the last instruction they have on file.

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Rules for defined contribution pensions

Defined contribution pensions (like SIPPs and workplace pots) are the easiest to pass on.

• Your remaining pot is fully inheritable. 
• This money can be passed on multiple times, for example, to a spouse and then if any is left when they die, onto children.

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Rules for defined benefit pensions

Defined benefit (or final salary) schemes are less flexible. Because there is no ‘pot’ of cash, you cannot usually pass a lump sum to children.

• Most schemes will pay a reduced income (often 50%) to a surviving spouse or civil partner for the rest of their life.
• Some schemes pay an income to children if they are under 18 (or 23 if in full-time education).
• Once your spouse dies and children grow up, the pension payments usually stop completely.

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Changes to inheritance tax on pensions (April 2027)

Historically, pension pots have been exempt from Inheritance Tax (IHT). This made them a popular way to pass wealth to family without hitting the IHT threshold.

However, the government has announced that from April 2027, unused pension funds and death benefits will be included in the value of a deceased person’s estate for Inheritance Tax purposes.

• What’s changing? Your remaining pension savings will be added to the value of your other assets (like property and non-pension savings) when calculating if your estate owes Inheritance Tax.‍
• What could be owed? If your total estate, now including your pension, exceeds your tax-free allowances, the estate may be liable for Inheritance Tax at 40% on the excess.

You can find regulated and impartial advisers through the MoneyHelper website. Or, if you’re over 50 with a defined contribution pension you can get free and impartial guidance through Pension Wise.

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