Calculate the tax on inherited pension death benefits. Compare lump sum vs drawdown, and find the tax-free vs taxable portion based on age at death.
It depends on the member's age at death. If the pension holder dies before age 75, death benefits (whether paid as a lump sum or passed to drawdown) are generally paid income tax-free to the beneficiary. If death occurs at age 75 or older, lump sum death benefits are taxed at the beneficiary's marginal income tax rate when received.
Under current rules (before the proposed 2027 IHT change), defined contribution pensions are outside the deceased's estate for inheritance tax purposes. Lump sum death benefits paid before age 75 are tax-free; after 75, they are taxed as the recipient's income. From April 2027, HMRC proposes that unused pension funds will form part of the estate for IHT purposes — a major change to pension planning.
Yes — you should complete an 'expression of wishes' or nomination of beneficiaries form with your pension provider. You can nominate anyone — family members, friends, or charities. The pension trustee has discretion over who receives the fund (this keeps it outside the estate for IHT), but they generally follow your nomination. Review this regularly as life circumstances change.
Inherited drawdown allows the beneficiary to keep the pension invested and draw income flexibly, paying tax only on amounts withdrawn. This can be more tax-efficient than taking a lump sum (which is all taxed in one year), especially if the beneficiary has other income. The disadvantage is complexity and investment risk remaining in the fund.
From April 2027, the government proposes that inherited pension funds will be included in the deceased's estate for inheritance tax purposes, potentially taxed at 40% (with no residence nil-rate band or spouse exemption for the pension portion). This would significantly reduce the tax efficiency of leaving pensions to adult children. Detailed rules were being consulted on in 2025/26.