Death in service and workplace protection benefits

Death in service benefit is life cover that comes with many jobs. If you die while you are still employed, your employer's pension scheme pays a lump sum, usually two or three times your salary, to your spouse, civil partner, or another person you have nominated¹. Some schemes pay more: the armed forces pension schemes pay a lump sum of four times final pensionable earnings on a death in service². The money is normally free of income tax and, from April 2027, the government has confirmed death in service benefits from registered pension schemes will stay outside your estate for inheritance tax⁴.

The cover is not a policy you buy. It is arranged through the workplace pension scheme, which means it is tied to the job: it stops when you leave, and you cannot take it with you. Many employers also offer group income protection, which pays a regular income if illness or injury stops you working for a long period, and some add group critical illness cover. This page explains what each of these workplace benefits pays, who receives the money, how the tax rules work, and where the cover stops.

What death in service benefit pays: two or three times salary, four in some schemes

The amount depends on the type of pension scheme your employer runs. In a defined benefit (salary-related) scheme, if you die before taking your pension, the scheme will usually pay out a lump sum to your spouse or civil partner, and this will typically be two or three times your salary¹. The scheme also usually continues a pension to your survivor: payments vary between schemes, but they are usually around 50% of what you would have received, paid to a spouse or civil partner after your death¹.

Some public sector schemes are more generous. Under the Armed Forces Pension Scheme 2005, if you die in service, your spouse, civil partner or eligible partner receives a pension for life worth 62.5% of a pension calculated in the same way as a Tier 3 enhanced ill-health pension, or, if greater, your actual pensionable service up to 37 years, and the lump sum is 4 times your final pensionable earnings². The Armed Forces Pension Scheme 2015 works the same way: on a death in service, a spouse or partner receives 62.5% of a Tier 3 enhanced ill-health pension equivalent amount for life, plus a tax-free lump sum of 4 times your final pensionable earnings³.

Because the payout is a multiple of salary rather than a fixed sum, it grows automatically as your pay rises, but it also means the cover may fall short of what a family with a large mortgage or young children actually needs. The guide to how much life insurance cover you need works through that calculation, and the comparison of death in service benefit or your own life insurance sets the two side by side.

Who gets the lump sum and how it is taxed

Who receives the money is decided by the scheme's trustees or administrators, guided by a nomination form you complete. Death in service benefits and pension lump sum benefits may not form part of your estate, and are often paid to one or more nominated people rather than passing under your will⁷. This is why keeping the nomination up to date matters: after a divorce, a court can attach a pension order so that the same percentage of any tax-free lump sum or death in service benefits is also paid to a former spouse⁸.

On tax, the key allowance is the lump sum and death benefit allowance (LSDBA), which is £1,073,100 for most people and counts tax-free lump sums taken from your pension before and after you die⁵. Lump sum death benefits that fall outside the available allowance are subject to a 55% tax charge payable by the scheme administrator, except a charity lump sum death benefit, and except where the member dies before age 75 for an uncrystallised funds lump sum death benefit⁹.

The inheritance tax position changes on 6 April 2027, when most unused pension funds and death benefits are brought into the estate¹⁰. Death in service benefits are the exception: the government has confirmed all death in service benefits payable from a registered pension scheme will be excluded from the value of an individual's estate for inheritance tax purposes from 6 April 2027, whether the scheme is discretionary or non-discretionary⁴. By contrast, lump sum death benefits from a defined benefit pension are included in the estate under the new rules¹², and a dependants' scheme pension paid to a spouse or civil partner will not be subject to inheritance tax even after April 2027⁶.

Where inheritance tax is due on a pension, it will be applied to the pension first, and beneficiaries will then be eligible for a statutory deduction, meaning they only pay income tax on the remaining amount after inheritance tax has been settled⁶. The narrow guide to whether a life insurance payout is subject to inheritance tax covers the rules for policies you buy yourself, and writing life insurance in trust explains how a policy can be kept out of the estate altogether.

Death in service in public sector pension schemes

Public sector schemes run on their own rules, and the benefits for survivors are often richer than the two or three times salary typical elsewhere. Spouses, civil partners and dependants may be entitled to benefits from the pension scheme of a deceased service person, and the death need not be related to service¹³. The armed forces schemes pay the four times earnings lump sum and the 62.5% survivor pension described above², and they continue to protect families after the member has left: under AFPS 05, if you die after leaving service and before your pension has come into payment, your spouse or partner receives a pension for life worth 62.5% of your deferred pension, plus the deferred pension lump sum you would have received². Under AFPS 15, if death occurs within 5 years of drawing the pension, the survivor receives a lump sum equal to 5 years of pension, minus any pension or lump sum previously received³.

The NHS has its own arrangements. Under the NHS Injury Benefit Scheme, surviving partners and dependants may receive a percentage of the former employee's average pay as a top up to another payment, such as an NHS adult dependant's pension¹⁴. The NHS Pension Scheme's death in service benefits will not be affected by the inheritance tax changes arriving in 2027¹⁵.

There are special rules for those who die on active service. Where a member of the armed forces, certain associated services, or the emergency services dies as a result of injury or disease on active service, there is a complete exemption from inheritance tax on the estate passing on death, and a reduced form IHT400 can be delivered¹⁶. The exemption does not cover lifetime gifts¹⁷. Separately, the Armed Forces Compensation Scheme provides bereavement compensation where a service person's or veteran's death on or after 6 April 2005 is predominantly caused by their service¹⁸.

Where death in service cover stops

The defining limit of death in service benefit is that it pays only where the scheme member dies while still employed⁶. Leave the job, and the cover ends: it is not a policy you own, and nothing can be transferred to a new employer or cashed in. This is why anyone changing jobs, being made redundant, or retiring early should think about the gap before their next employer's scheme begins, and the guide to term life insurance explains the cover that stays with you.

A second limit sits inside the pension rules. Where a person is an active member and dies in service, there is no return of contributions, under the rules governing schemes such as those in Scotland¹⁹. And at the level of scheme protection, the Pension Protection Fund does not step in for every arrangement: schemes that only provide death in service benefits are not eligible for PPF protection²⁰. That matters if the employer fails, because the lump sum cover depends on the scheme and its insurer continuing to stand behind it.

Group income protection: a regular income if you cannot work

Death in service covers your family if you die. Group income protection covers you if illness or injury means you cannot work. Income protection policies give you an income if you can no longer work due to ill health or disability, sometimes called incapacity²¹. The payout is a regular tax-free monthly income, paid for inability to work due to any illness or injury²².

The range of conditions covered is wide: essentially any illness or disability that leaves you unable to work for a period of time, including physical conditions such as cancer or a heart attack, and mental health conditions including stress²³. That breadth is the main difference from group critical illness cover, which pays a lump sum only for a defined list of serious conditions; the guide to how critical illness cover works sets out that approach.

As with any claim, you will need to meet the insurer's definition of being unable to work, which may involve medical evidence²³. The Financial Ombudsman Service handles complaints about income protection insurance, including disputed claims, so there is a route to an independent decision if a claim is refused²¹. The definitions of "unable to work", such as own occupation or suited occupation, are explained in the guide to incapacity definitions.

Group income protection: a share of salary after a waiting period

Group income protection does not start paying from the first day off sick. Payments begin after a waiting period, known as the deferred period, which is set by the policy and is often aligned with the length of the employer's sick pay. During that time, employer sick pay usually covers you; the guide to statutory sick pay and state support explains what the minimum looks like, and the guide to deferred periods explains how the choice affects the cover.

Once payments begin, they replace a share of salary rather than all of it, as the timeline below shows. Because the employer pays for the scheme, the cover is a benefit of the job rather than something you choose or can adjust: the deferred period, the percentage of salary, and the policy's end date are all fixed by the arrangement between your employer and the insurer.

One practical point on cost: if you receive sick pay or have access to group income protection through work, you may not need as much individual cover²³. Anyone weighing up a private policy alongside a workplace scheme can compare the two in the guide to short-term or long-term income protection and the breakdown of how much of your salary income protection pays.

How long group income protection pays and how state benefits affect it

Once payments begin, they will usually continue until you are able to return to work, or until the policy ends²³. The policy's end date is set when the employer arranges the scheme: some run to a fixed term, others to retirement age. The guide to how long income protection claims pay out explains the differences, and the guide to when income protection will not pay out covers the exclusions, such as not meeting the insurer's definition of incapacity.

Because the income from a group policy is tax-free²², it sits alongside any state benefits rather than replacing them automatically. Means-tested benefits can be affected by insurance payouts, and the guide to whether income protection affects your benefits explains the interaction. Anyone claiming should also report changes in circumstances to the relevant benefits office, since a new income can change entitlement.

Pension contributions and other costs group cover can include

Workplace protection schemes sometimes do more than pay a lump sum or an income. If you are retiring early due to an illness that is likely to affect your life expectancy, some pension providers may boost your pension²⁶. The NHS Injury Benefit Scheme shows the same principle in the public sector: survivors may receive a percentage of the former employee's average pay as a top up to another payment¹⁴.

It is also worth knowing what other financial protections may already exist around a household, because they change what a family needs from workplace cover. When someone dies, it is always worth checking carefully whether the deceased's debts are covered by death cover for a mortgage, payment protection cover for personal loans or credit cards, or death in service from a pension²⁷. A mortgage payment protection policy is an insurance policy that covers your repayments if you become ill or lose your job²⁸, and nidirect's guidance on avoiding losing your home describes how such cover fits with a mortgage²⁸.

For employees in share schemes, death has its own rules: shares must come out of a Share Incentive Plan on death, with no income tax or National Insurance contributions to pay, though personal representatives may pay Capital Gains Tax if the shares are sold for more than their value at the date of death²⁹. None of these replace death in service benefit, but together they shape how much protection a family actually has.

Support services that come with workplace protection

Group schemes often come with services as well as money. Insurers and employers add helplines, counselling, employee assistance programmes, and return-to-work support to group income protection and group life policies, and the guide to extra services with protection policies explains what these typically include and how to use them. Access differs between schemes, so the policy's support schedule, available from the employer or insurer, is the place to check who can use each service.

After a death, a wider network of official support exists. The DWP Bereavement Service can cancel the person's benefits and entitlements, including their State Pension, and will check whether the family is eligible for help with funeral costs or other benefits³⁰. Reporting through the Tell Us Once service, if someone dies while receiving benefits, handles several government departments in one notification³¹. In Northern Ireland, the Bereavement Service can also stop the payment of any other benefits the deceased person was receiving³². People living abroad who paid UK National Insurance can contact the International Pension Centre about bereavement benefits and related entitlements³³.

Claiming after a death and resolving disputes

For a family, claiming death in service benefit starts with the employer and the pension scheme administrator, and the steps run in a fairly consistent order:

1. Tell the employer's HR or pensions team and the scheme administrator, who will confirm what the scheme pays and ask for the death certificate and any nomination form.
2. Report the death through Tell Us Once where the person was receiving benefits, which cancels benefits and state pension entitlements in one go³¹.
3. Contact the DWP Bereavement Service, which cancels benefits and checks eligibility for help with funeral costs³⁰.
4. Use the Death Notification Service to tell participating banks, but check the rest of the estate directly: the service only covers the participating banks, so other institutions, loans, investments, shares and other debts must be checked and the providers contacted³⁴.
5. If the person was in a Share Incentive Plan, arrange for the shares to come out of the plan, noting the tax position above²⁹.
6. Where the death was of a service person or veteran, ask about armed forces scheme benefits, and request a claim form for Armed Forces Compensation Scheme bereavement benefits if the death occurs after the individual has left service, or where an eligible child is not living with the spouse or partner, or there is no spouse, partner or surviving adult dependant¹⁸.

Disputes do arise, usually over who should receive the money. The Pensions Ombudsman publishes a death benefit lump sums information sheet covering what death benefits are, common issues that can arise, and how the ombudsman can help if a dispute cannot be resolved³⁵. Complaints about an insurer's handling of an income protection claim go to the Financial Ombudsman Service²¹. The guide to claiming on a life insurance policy after someone dies covers the documents and process for individual policies.

Workplace cover or your own policy: what each one gives you

The two kinds of cover answer different needs, and the comparison of death in service benefit or your own life insurance works through them in detail. In outline:

The strongest argument for workplace cover is that it is free to the employee and requires no shopping around. The strongest argument for an individual policy is that it is portable: it continues through job changes, redundancy, and self-employment, when death in service cover would stop. Many people hold both, using the employer's scheme as the base and topping up with an individual policy for the shortfall, and the guide to how much life insurance you need helps size that gap. The same logic applies to income cover: if you have access to group income protection through work, you may not need as much individual cover²³, and the guide to whether you need income protection if you have sick pay or savings weighs the alternatives.

Protection if an insurer fails

If the insurer behind a workplace scheme or an individual policy fails, the Financial Services Compensation Scheme steps in. For claims arising from the death or incapacity of a policyholder due to injury, sickness or infirmity, FSCS protection covers 100% of the claim, for firms that failed on or after 3 July 2015³⁶. Its published guidance states the same in plain terms: for the death or incapacity of the policyholder due to injury, sickness or infirmity, the scheme covers the entire claim³⁷.

This is one of the strongest protections in financial services, and it applies equally to group schemes arranged by employers and to policies bought directly. The narrow guide to whether your life insurance is protected if the insurer fails explains the detail, including what happens while a failing insurer is being transferred to a new owner.