How Inherited Pensions Are Taxed
The tax you pay on an inherited pension depends on three main factors: the type of pension (DC or DB), the age of the person who died, and how you choose to receive the benefits. Understanding these rules is essential for making the right decisions about your inherited pension and minimising your tax bill.
Since the pension freedoms of April 2015, the tax treatment of inherited DC pensions has been significantly more generous than it was previously. Before 2015, inherited pension funds could be taxed at rates as high as 55%. Today, inherited pensions can be completely tax-free in many cases.
The Age 75 Rule: The Key Tax Dividing Line
The most important factor in determining the tax on your inherited pension is whether the original pension holder died before or after their 75th birthday. This is known as the age 75 rule.
| Scenario | Lump Sum | Drawdown Income | Annuity Income |
|---|---|---|---|
| Member died before 75 | Tax-free (within LSDBA) | Tax-free | Tax-free |
| Member died at 75 or over | Taxed at your marginal rate | Taxed at your marginal rate | Taxed at your marginal rate |
For more detail on how this threshold works, see our dedicated guide on pension death benefits before and after age 75.
Tax-Free Inherited Pensions (Death Before 75)
If the pension holder died before their 75th birthday, you as the beneficiary can receive the pension completely free of income tax. There is no limit on the amount you can receive tax-free through beneficiary drawdown or annuity. However, for lump sum payments, there is a limit called the lump sum and death benefit allowance (LSDBA) of £1,073,100.
Key points for tax-free inherited pensions:
- You pay no income tax on any withdrawals from beneficiary drawdown
- You pay no income tax on annuity payments purchased with the inherited fund
- Lump sums are tax-free up to the LSDBA (shared with any tax-free lump sums the deceased took during their lifetime)
- The pension provider must be notified and you must be designated within two years for lump sums to qualify for tax-free treatment
- You do not need to declare tax-free inherited pension income on your self-assessment tax return
Taxable Inherited Pensions (Death at 75 or Over)
If the pension holder died at 75 or older, all withdrawals from the inherited pension will be treated as your income and taxed at your marginal rate. The tax you pay depends on your total income for that tax year:
| Your Total Income (2025/26) | Income Tax Rate | Tax on £100,000 Withdrawal |
|---|---|---|
| Up to £12,570 | 0% (personal allowance) | £0 on first £12,570 |
| £12,571 – £50,270 | 20% | £7,540 (if no other income) |
| £50,271 – £125,140 | 40% | Up to £40,000 |
| Over £125,140 | 45% | Up to £45,000 |
Why Drawdown Beats a Lump Sum for Tax
If you inherit a pension worth £300,000 from someone who died at 75 or over, taking it all as a lump sum in one year would result in a significant portion being taxed at 40% or even 45%. But if you take £30,000 per year over ten years through beneficiary drawdown, you might keep most of it within the basic-rate band and pay only 20% tax.
Tax on Inherited DB Pensions
If you inherit a dependant's pension from a defined benefit scheme, the tax treatment is different from DC pensions. DB dependant's pensions are always taxed as income at your marginal rate, regardless of the age at which the member died. There is no tax-free option for DB dependant's pensions.
However, DB lump sum death benefits (such as death-in-service payments) follow similar rules to DC lump sums — tax-free if the member died before 75 (and paid within two years), and taxed at your marginal rate if they died at 75 or over.
National Insurance on Inherited Pensions
Inherited pension income is not subject to National Insurance contributions, regardless of your age or employment status. You only pay income tax on inherited pension withdrawals. This is a notable advantage compared to employment income, which is subject to both income tax and National Insurance.
The 2027 IHT Changes: Double Taxation Risk
From April 2027, unused pension funds will be brought within the scope of inheritance tax. This means the pension value will be added to the deceased's estate for IHT calculation. If the total estate exceeds the nil-rate band, the beneficiary could face both IHT at 40% and income tax on withdrawals.
The government has acknowledged the double taxation problem and indicated there will be relief, but the details have not been finalised. The potential combined tax bill could be substantial:
| Tax Scenario (Post-2027, Death at 75+) | Tax Rate | On £200,000 Pension |
|---|---|---|
| IHT on pension value (estate over nil-rate band) | 40% | £80,000 |
| Income tax on remaining £120,000 at 40% | 40% | £48,000 |
| Total tax (without double-taxation relief) | 64% | £128,000 |
This illustrative example shows why the 2027 changes are so significant. Read our guides on pensions and IHT from April 2027 and pension IHT double taxation for full analysis.
Successor Beneficiaries: Can You Pass It On Again?
Some pension providers allow you to nominate successor beneficiaries for an inherited pension. This means that when you die, the remaining pension fund can pass to the next generation rather than being paid as a lump sum to your estate. Not all providers offer this option, so check with yours if multi-generational pension inheritance is important to you.
Steps to Take If You Inherit a Pension
- Contact the pension provider as soon as possible after the death — the two-year rule for tax-free lump sums makes prompt action important
- Find out whether the member died before or after 75 — this determines the entire tax position
- Understand your options — lump sum, drawdown, or annuity. Do not rush into a decision
- Consider the tax implications — if the member died at 75+, beneficiary drawdown is usually more tax-efficient than a lump sum
- Seek professional advice for large inherited pensions — the interaction between income tax, IHT, and your personal circumstances can be complex
Next Steps
If you have inherited a pension or expect to, understanding the tax position is essential for making the right choices. For complex situations or large inherited pension pots, consider speaking to an FCA-regulated adviser. Get matched with an adviser for personalised guidance.