Autumn Budget on 28 October 2026. The Chancellor could change some of these rules. We will re-check this page in the week after the Budget and update the date below.
In 30 seconds
- Death under 75: beneficiaries usually pay no income tax, if the money is paid or designated within two years.
- Death at 75 or over: beneficiaries pay income tax at their own rate on what they take out.
- Taking a £200,000 inherited pot in one year can cost a basic-rate earner nearly £30,000 more tax than spreading it over ten.
- From April 2027, inheritance tax may apply too.
Key figures
The age that decides the income tax
When someone dies with money left in a defined contribution pension, such as a personal pension, SIPP or most workplace pensions, the pension scheme pays it to the people they chose. How much income tax those people pay depends mainly on one thing: how old the person was when they died.
| Age at death | Lump sum | Drawdown or annuity income |
|---|---|---|
| Under 75 | Usually tax-free, up to the lump sum and death benefit allowance (£1,073,100) | Usually tax-free |
| 75 or over | Taxed as the beneficiary's income | Taxed as the beneficiary's income |
The two-year rule
For deaths under 75, the tax-free treatment only applies if the money is paid out, or moved into beneficiary drawdown, within two years of the scheme being told about the death. Miss that window and the whole amount is taxed as income. Executors should tell pension providers quickly.
Worked example: a £200,000 pension inherited after 75
Sam inherits £200,000 from a parent who died at 80. Sam earns £40,000 a year. Because the parent was over 75, everything Sam takes out is added to Sam's income for that year.
| How Sam takes it | Total income tax | Sam keeps |
|---|---|---|
| All £200,000 in one tax year | £88,717 | £111,283 |
| £50,000 a year for 4 years | £71,784 | £128,216 |
| £20,000 a year for 10 years | £59,460 | £140,540 |
Taking it all at once pushes most of it into the 40% and 45% bands and wipes out Sam's Personal Allowance, which disappears above £125,140. Spreading it out over ten years saves nearly £30,000.
That is why many schemes let beneficiaries keep the money invested in beneficiary drawdown and take it gradually. If the beneficiary pays little or no tax, for example a grandchild at university, small yearly withdrawals within the £12,570 Personal Allowance can be tax-free.
What changes from April 2027
From 6 April 2027, most unused pensions also count towards the estate for inheritance tax. That adds a second layer:
- Death under 75: no income tax for the beneficiary, but the pension can now face inheritance tax if the estate is over its allowances.
- Death at 75 or over: inheritance tax may apply first, and then income tax when the beneficiary takes the money out.
In the worst case, when the estate is above its allowances and the beneficiary pays 45% income tax, the combined rate on the pension above the allowances can reach 67%. For a higher-rate beneficiary it is 64%.
If the pension goes to a spouse or civil partner, it stays free of inheritance tax, but the over-75 income tax rule still applies to them.
What to do now
If you have a pension
- Check your expression of wish form with every provider. It tells the scheme who you want the money to go to. Out-of-date forms are common after divorce or a death in the family.
- Ask what options your beneficiaries will have. Not every scheme offers beneficiary drawdown to everyone. If a scheme can only pay a lump sum, someone inheriting after you die at 75 or over could face a large tax bill in one year.
- Think about who pays less tax. If you are likely to live past 75, money left to someone on a low income may lose less to income tax than money left to a higher earner.
If you have inherited a pension
- Ask the scheme how old the person was treated as being at death, and what options you have: lump sum, beneficiary drawdown or annuity.
- If the person was under 75, make sure the money is paid or designated within the two-year window.
- If the person was 75 or over, plan withdrawals around your own tax bands before taking anything.
This is a complicated area with large sums at stake. A regulated financial adviser or tax adviser can model your options.
Estimate inheritance tax on your estate from April 2027Free, no sign-up, nothing you type leaves your browser.
Open the calculatorCommon questions
What is beneficiary drawdown?
It lets the person who inherits keep the money invested in a pension and take it out when they choose, instead of as one lump sum.
Do I have to take an inherited pension straight away?
Usually not, if the scheme offers beneficiary drawdown. But if the person died under 75, it must be paid or designated within two years to stay tax-free.
Will taking money from an inherited pension cut what I can pay into my own pension?
No. HMRC lists payments from a beneficiary's flexi-access drawdown fund among the payments that do not trigger the money purchase annual allowance.
Can the inherited pension be passed on again?
Usually yes. Money left in beneficiary drawdown can normally be passed on when the beneficiary dies, with the same under-75 and over-75 tax rules applying to their age at death.
Sources
- GOV.UK: Tax on a pension you inherit
- GOV.UK: Lump sum and death benefit allowance
- GOV.UK policy paper: Inheritance Tax on unused pension funds
- GOV.UK: Income Tax rates and Personal Allowances
- RSM UK: inheritance tax on pensions from April 2027
- HMRC Pensions Tax Manual: payments that do not trigger the MPAA (PTM056530)
This guide is general information, not personal financial advice. Rules can change and your situation may differ. For free, impartial help, contact MoneyHelper, or speak to a regulated financial adviser.
