Tax on Inherited Private Pension: UK Rules for Beneficiaries

The tax on inherited private pension benefits depends mainly on the type of pension, the age of the pension holder when they died and how the beneficiary receives the money. In many cases, inherited pension benefits can be paid as a lump sum or taken as pension income, but different Income Tax rules can apply.

Beneficiaries should also be aware of an important upcoming change. From 6 April 2027, most unused pension funds and certain pension death benefits are due to be included within the deceased person’s estate for Inheritance Tax purposes. This means the tax on inherited pensions UK needs to be considered from both an Income Tax and, where applicable, an Inheritance Tax perspective. Ultimate personal tax planning in uk can help beneficiaries consider pension withdrawals alongside their other income, allowances and overall tax position.

How Is an Inherited Private Pension Taxed?

Private pension holders will often complete a beneficiary nomination or expression of wish telling their pension provider who they would like to receive their remaining pension benefits after death.

The eventual treatment depends on the pension scheme rules. The beneficiary may be able to receive the pension as a lump sum, through drawdown or as another form of pension income.

For Income Tax purposes, one of the most important factors is whether the pension holder died before or after age 75.

Tax on Inherited Pensions When Someone Dies Before Age 75

If the pension holder dies before reaching age 75, qualifying benefits from a defined contribution pension can generally be paid to the beneficiary free of Income Tax, subject to the applicable pension rules and allowances.

The beneficiary may, depending on the scheme, be able to:

• Take an inherited pension lump sum.
• Keep the money invested and take income through beneficiary drawdown.
• Use the pension benefits to purchase an annuity.

However, tax-free treatment should not simply be assumed. The type of benefit, relevant pension allowances and the circumstances of the payment must still be considered.

Tax on an Inherited Private Pension After Age 75

If the pension holder dies aged 75 or over, pension benefits received by an individual beneficiary are generally subject to Income Tax at the beneficiary’s marginal rate.

This means inherited pension withdrawals are added to the beneficiary’s other taxable income. Depending on their overall income, withdrawals may therefore be taxed at the basic, higher or additional rate.

For example, taking a substantial inherited pension lump sum in a single tax year could push part of the beneficiary’s income into a higher tax band. Where the pension arrangement permits flexible withdrawals, the timing and amount taken can therefore affect the overall tax liability.

Scottish taxpayers should consider the Scottish Income Tax bands and rates that apply to relevant pension income.

Does Inheritance Tax Apply to an Inherited Private Pension?

Under the rules applying before 6 April 2027, unused funds in many discretionary pension arrangements can generally pass outside the deceased person’s estate for Inheritance Tax purposes.

However, this treatment is changing.

For deaths occurring on or after 6 April 2027, most unused pension funds and relevant pension death benefits will be brought into the deceased person’s estate when calculating Inheritance Tax. Our guidance on unused pension funds and IHT from April 2027 explains this forthcoming change and how it may affect the wider estate calculation.

This does not mean every inherited pension will automatically suffer IHT. Whether tax is payable will depend on the total estate, available nil-rate bands, exemptions and reliefs, and who receives the benefits. Understanding the tax responsibilities when managing an estate in London can help personal representatives deal with the wider valuation, reporting and tax obligations arising after death.

Could an Inherited Pension Be Subject to Both IHT and Income Tax?

From April 2027, beneficiaries may need to consider two separate tax regimes.

First, relevant unused pension funds may be included when calculating the deceased person’s estate for inheritance tax pension purposes. Second, the beneficiary may separately face Income Tax when pension benefits are paid to them, particularly where the pension holder died aged 75 or over. Understanding the IHT treatment of pension death benefits in London can help distinguish the estate-level Inheritance Tax position from the beneficiary’s separate Income Tax liability.

The existence of both regimes does not mean the same rate of tax automatically applies to every inherited pension. The outcome will depend on the estate, pension arrangement, age at death, beneficiary and method of taking the pension benefits.

Inherited Defined Benefit Pensions

The rules for defined benefit pensions can differ substantially from those applying to defined contribution pension pots.

A defined benefit scheme may provide a dependant’s pension or another form of survivor benefit following the member’s death. Who can receive these benefits and how much they receive depends heavily on the individual pension scheme’s rules.

Beneficiaries should therefore check the scheme documentation and speak to the pension provider rather than assuming the same options available under a defined contribution pension will apply.

Why Pension Beneficiary Nominations Matter

A pension holder can usually complete an expression of wish or beneficiary nomination identifying the people they would like to receive their pension benefits after death.

These nominations should be reviewed following major changes such as:

• Marriage or entering a civil partnership.
• Divorce or separation.
• The birth of children or grandchildren.
• The death of a previously nominated beneficiary.
• Changes to the pension holder’s wider estate plan.

A beneficiary nomination is not the same as a will, and the precise effect of a nomination depends on the pension arrangement. Pension planning should therefore be reviewed alongside the individual’s wider succession arrangements. Separately, beneficiaries may in some circumstances consider changing a will after death in London where the distribution of assets passing through the estate no longer achieves the intended outcome.

Understanding the requirements for a valid will is also important for assets that pass through the deceased’s estate, while pension benefits remain subject to the rules and nomination arrangements of the particular pension scheme.

What Should You Do When You Inherit a Private Pension?

Before deciding how to take an inherited pension, establish exactly what type of pension you have inherited and what options the provider permits.

You should check:

• The pension holder’s age when they died.
• Whether the pension is defined contribution or defined benefit.
• The available lump-sum, drawdown or income options.
• The Income Tax consequences of each option.
• Whether relevant pension allowances affect the payment.
• Whether the April 2027 IHT rules apply to the death.

Where a taxable inherited pension is substantial, considering the timing of withdrawals can be particularly important because additional pension income may move the beneficiary into a higher Income Tax band.

Understanding Tax on Inherited Private Pension Benefits

The tax on inherited private pension benefits cannot be determined simply by looking at the value of the pension. The pension holder’s age at death, pension type, beneficiary and way the benefits are taken can all affect the final tax position.

The position becomes particularly important from 6 April 2027, when most unused pension funds and relevant death benefits are due to enter the estate for Inheritance Tax purposes. Beneficiaries and pension holders should therefore consider inherited private pension tax alongside wider estate planning rather than treating pension and inheritance taxes separately. Where an individual’s wealth also includes substantial company shares or equity awards, estate planning with RSUs in London can help ensure these assets are considered alongside pensions within the wider succession plan.

Disclaimer: This article provides general information on UK taxation of inherited private pensions. Pension and tax treatment depends on the specific pension arrangement, date and age at death, beneficiary circumstances and applicable tax rules.

Case Study: Managing the Tax on an Inherited Pension After Age 75

Sarah approached our Farringdon office after inheriting a defined contribution pension from her father, who had died aged 78. The pension provider offered several options, including taking a substantial lump sum or leaving the funds invested and making withdrawals over time. Sarah initially considered withdrawing the entire pension immediately.

Cigma Accounting reviewed Sarah’s existing employment and investment income alongside the value of the inherited pension. We explained that because her father had died after age 75, pension benefits paid to her would generally be subject to Income Tax at her marginal rate.

Taking the full amount in one tax year could therefore significantly increase Sarah’s taxable income and push a larger proportion of the pension withdrawal into higher Income Tax bands. Where permitted by the pension arrangement, we considered how different withdrawal amounts and timings could affect her overall personal tax position rather than assuming that a single lump sum was the most suitable option.

We also explained the separate Inheritance Tax treatment of pension benefits, including the forthcoming change for deaths from 6 April 2027. This helped Sarah understand that estate-level IHT and the Income Tax she might personally pay when receiving pension benefits are separate considerations.

As part of the wider review, Cigma Accounting considered Sarah’s personal tax, Self Assessment, investment income and pension taxation. We also recommended that she confirm the available benefit options and payment conditions with the pension provider before making a final withdrawal decision.

Sarah was left with a clearer understanding of how her inherited pension would be taxed and why the timing of withdrawals could materially affect the amount of Income Tax she ultimately paid.