Inheriting a pension: what happens and is there tax to pay?
What to know if you're passing on or inheriting a pension
Pensions with money left in them can often be passed on after you die. For most, this is free from Inheritance Tax – even after major changes that take effect in April 2027. Plus, the beneficiary may not always need to pay income tax when they get the money. This guide explains how passing on a pension works and whether tax will need to be paid.
With thanks to Dr Robin Keyte for sense-checking this guide.
Many pensions can be passed on – some free of tax
Saving into a pension is something many people do, often for decades, so they'll have an income to live off once they retire. In that time it's quite possible to save £10,000s, £100,000s or even millions into a pension.
Yet there's no guarantee you'll spend all that money before you die. And as some pensions, or elements of them, can be passed on, it can be worth thinking about as part of your future financial planning.
And there's a big change on the way that will affect a small number of people. From 6 April 2027, unused pension pots – including Money Purchase (defined contribution) pensions, SIPPs and drawdown arrangements – will become liable for Inheritance Tax (IHT), unless going to a spouse or civil partner.
Currently only 5% of estates pay IHT, and it's estimated that the changes will see 8% paying IHT.
So for the majority of people, inheriting a pension will remain the same. Some beneficiaries will need to pay income tax on an inherited pension at their marginal rate, while others won't be liable to pay income tax – meaning inheriting a pension can be completely tax-free.
So, below we have eight key need-to-knows about passing on a pension. These are aimed at both people who are passing on a pension and those inheriting one.
If you're not sure about the best way to pass on your pension – or how best to use a pension you've inherited – it's sensible to speak with a financial adviser.
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Money Purchase pensions can normally be passed on
These days, the most common type of pension is a Money Purchase pension (also known as a defined contribution pension).
This is where you put in money to build up a pension savings 'pot' – for example from your salary. What you'll end up with is directly related to what you put in – in other words, the more of your salary you're able to put aside over the years, the bigger the pension pot will be when you retire.
Most modern workplace pensions are Money Purchase pensions – as are group personal pensions and stakeholder pensions.
Self-invested personal pensions (SIPPs) – while also a form of Money Purchase pension – differ to those above in that you have more say over where to invest your money (if you're interested in operating a DIY-pension, see our SIPPs guide).
With Money Purchase pensions, once you're able to access the cash (currently at age 55, though this is rising to 57 from April 2028), you can usually take it either in a lump sum, as multiple smaller payments (known as 'drawdown'), or as a combination of both.
Regardless of whether you've started spending the money in a Money Purchase pension pot or not, any money left in the pot at the time of your death can normally be passed on – which is why it's important to fill in an 'expression of wishes' form. However, there is one caveat...
Have you used your pension to buy an annuity?
An annuity is a guaranteed, regular income for life (or set period) which you can buy using the money in a pension pot.
If you've bought a 'single-life' annuity, this will stop paying out once you die, even if it hasn't paid out the equivalent of what you bought it for. This means there's unlikely to be anything to pass on when you die.
But if you've bought a 'joint life' annuity, or a single or joint annuity with a 'guaranteed period', these will continue to pay out after your death to whoever else is named on the annuity (for example, a spouse). However they are generally more expensive to buy than a simple 'single-life' annuity – meaning you'll get a lower monthly payment for the same size pension pot.
It's worth weighing up your options carefully and speaking to a qualified financial adviser before buying an annuity.
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Salary Scheme pensions are more restrictive
Salary Scheme pensions (also known as defined benefit pensions) used to be commonplace, but employers have steadily moved away from them as they're expensive to run.
A Salary Scheme pension is essentially a guarantee from your employer of a regular income while you're retired (often based on your final salary or an average of your salary, as well as the number of years you were in the scheme). Salary Scheme pensions normally stop paying out after you die, as technically there's no 'pot' of money to leave behind.
But, depending on the scheme you're part of, a Salary Scheme pension might continue to pay out after you die – though if it does it'll likely be at a reduced rate and only to a close dependant. In some cases, a Salary Scheme pension might pay out a lump sum to your chosen dependant – such as a 'death in service' or 'pension protection' lump sum – rather than a regular income.
Where it will continue to pay out, see our Expression of wishes guide for more information on how to nominate who'll benefit.
Salary Scheme pensions can vary though, so if you need more information on how yours works, it's best to speak with the scheme administrator.
Quick questions:
Can a Salary Scheme pension pay out to someone other than a close dependant?
Depending on the scheme's rules, you might be able to nominate someone other than a close dependent to receive the income from your Salary Scheme pension after your death. However, even if the scheme's rules allow it, there are some circumstances where this might be taxed at 55% as an 'unauthorised payment' – so it's best to check what the exact rules are with your pension scheme provider.
Can I transfer from a Salary Scheme pension to a Money Purchase pension?
It's sometimes possible to transfer from a Salary Scheme pension to a Money Purchase pension. In other words, substitute the regular income you get from a Salary Scheme pension for a lump sum in a Money Purchase pension pot.
Yet there are serious risks involved with giving up a Salary Scheme pension, such as giving up your own regular income and forfeiting any other benefits associated with the pension. If you're considering transferring your Salary Scheme pension to a Money Purchase pension as a way to pass on money after you die, it's best to discuss first with a financial advisor.
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Your state pension can sometimes be boosted after a spouse / civil partner has died
The state pension works differently to the types of personal pensions described above. How much you get is based solely on the amount of national insurance contributions you make during your working life, and this is especially true for those who reached state pension age on or after 6 April 2016 (when the 'new' state pension came into play).
But if you're married or in a civil partnership, your spouse might still be able to boost their own state pension entitlement after you die – though it's more likely if you reached state pension age under the old arrangements (before 6 April 2016). And it'll still depend on a number of factors, including:
The number of years you paid national insurance for. The longer you worked and made national insurance contributions for, the more your spouse might be able to boost their own state pension entitlement.
Whether you received extra or additional state pension / protected payment / state pension top-up / 'graduated retirement benefit'. If you were paid any of these, your spouse might be able to inherit it.
Working out whether you're able to boost your state pension following the death of a spouse or civil partner can be complex. The Department for Work and Pensions' online tool allows you to see what you may get if your partner dies, based on your own circumstances.
If it looks like you are entitled to top up your state pension through a deceased partner, you can start the process by contacting the Pension Service.
Quick question:
What happens if I die while deferring my state pension?
What happens will depend on whether you fall under the old or new pension system
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If you reach state pension age on or after 6 April 2016
(the 'new' system) and have delayed or stopped claiming your state pension for a while, your spouse or civil partner won't inherit any of the 'extra' state pension that you've built up. Instead, the beneficiaries of your estate will receive three months' backdated state pension.
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If you reached State Pension age BEFORE 6 April 2016
(the 'old' system) and you die while deferring your state pension (or are claiming your deferred state pension when you die), your partner might be able to inherit part or all the 'extra' state pension or lump sum you've built up. You and your partner must be in a marriage or civil partnership at the time of your death.
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Use an 'expression of wishes' form to nominate who you'd like to inherit your pension
If there's someone specific in mind you'd like to inherit your pension (and the pension scheme's rules allow inheriting) then it's important to nominate that person in writing. If you don't, it's far less certain that person will ultimately inherit.
To do this, you should fill in what's known as an 'expression of wish and nomination' form – one for each pension you've got. See our What happens to my pension when I die? guide for more on how to do this.
Do note you shouldn't use a will as the means of nominating who gets your pension.
A will is still very important. While a will has little bearing on what happens to your pension, a will is still very important when it comes to determining what happens to the rest of your 'estate' when you die. See our Cheap and free wills guide for more information on how to write one.
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Most people don't pay Inheritance Tax on their pension – and this won't change even after Inheritance Tax rules change in April 2027
The majority of people won't be liable to pay Inheritance Tax (IHT) on a pension they pass on. This is the case under current IHT rules, and will remain so even after the rules change in 2027.
Under current rules, while property, savings, investments and assets count towards the value of your 'estate' – the figure used to determine whether you pay IHT – the value of your pension doesn't (some exceptions to this can apply). In other words, pension savings are normally exempt from IHT currently.
This is set to change from 6 April 2027, when any unspent money left in your pension pot WILL start forming part of your estate for the purpose of IHT.
This will include any money left in a Money Purchase scheme, SIPP or drawdown fund – though importantly it won't usually include annuities and Salary Schemes (defined-benefit) pensions that are already paying out (plus any unspent pension you leave to a spouse or civil partner is always exempt from Inheritance Tax).
Yet, as we go on to explain in the next point, the number of people who pay IHT on a pension will remain very low, and the vast majority will continue to pay no IHT. And even if you do have to pay IHT, there are ways to reduce the bill...
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Likely to pay IHT? From April 2027, your pension might be included... but there ARE things you can do to mitigate tax
As mentioned, most unused pension funds will start to form part of your estate from April 2027. One result of this is you'll no longer be able to use a pension to pass on wealth tax-efficiently.
As a result, more estates will pay IHT than before – it's estimated to increase from 5% to 8%. So while the majority of estates will continue not be affected, a larger minority will be liable for IHT at 40%.
If you are one of those who will likely pay IHT, there are things you can consider doing instead:
Spend the money
One way to reduce a potential Inheritance Tax bill is to spend your money, including anything in your pension (it's your money after all!).
This is arguably the simplest way of Inheritance Tax planning, as the money won't be in your pension (and by extension, your estate) any longer – though be mindful, the more money you take from your pension, the more income tax you'll likely pay.
As the saying goes: no point in being the richest man in the graveyard.
Exchange your pension for an annuity
Not all types of pension will start forming part of your estate after April 2027.
Annuities – where you exchange part or all of your pension for a regular income for life – will normally remain outside the scope of Inheritance Tax. So one way of reducing an Inheritance Tax bill could be to exchange your pension for an annuity.
However, you'll need to live for a decent amount of time for this to pay off (and there's no guarantee that will happen), as annuities tend to stop paying out after you die. While some annuities continue to pay out after you die (in some cases a lump sum), these pensions are more likely to be subject to Inheritance Tax.
Before taking out an annuity, you should seriously consider financial advice.
Use gifting rules to give money away during your lifetime
Not strictly related to your pension, but gifting from your assets, savings and regular income to other people can reduce an Inheritance Tax bill.
See our Ways to legally reduce your Inheritance Tax bill guide for more info .
Get advice
Our Inheritance Tax guide is a good place to start to learn the basics.
Yet as reducing the bill can be more complex than simply spending your money or giving it away, if you're one of the few who will pay Inheritance then it's also probably sensible to seek specialist help from a financial adviser (if you've got enough money to pay Inheritance Tax, you can probably afford tailored advice).
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Some people pay income tax if they inherit a pension, but others don't
Some people pay income tax on pensions they inherit, others don't. This means that for some it's possible to inherit a pension entirely tax-free (no inheritance tax, no income tax).
Generally speaking:
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You WON'T pay income tax if the pension owner died before reaching 75.
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You WILL pay income tax if the pension owner died after reaching 75.
This rule of thumb applies to money purchase pensions, most drawdown funds and annuities that continue to pay out after the pension owner has died – though be mindful there are some scenarios where income tax might be due even if the original pension holder died before reaching 75.
Salary Scheme pensions are more complicated. If it continues to pay an income to a dependant after the owner's death, income tax will be due regardless of how old the owner was when they died. But if the pension scheme pays out a lump sum instead, the 75 rule is likely to apply.
For more information on whether you need to pay income tax on an inherited pension, see the Gov.uk website.
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Where income tax is due on a pension you inherit, it'll be at your own marginal rate
If you need to pay income tax on a pension you've inherited then it will be at your own marginal rate. So for basic-rate taxpayers, the rate'll be 20%, for higher-rate taxpayers it'll be 40%, and so on...
But where you're already on the threshold of a higher tax band, drawing on an inherited pension could push you into it – meaning you're charged a higher rate of tax on the portion of your income above your current tax band as a result.
The way it works means that, generally speaking, a non-taxpayer will pay less income tax on an inherited pension than a basic-rate taxpayer would, while a basic-rate taxpayer will pay less than a higher-rate taxpayer, etc. This is an important consideration if you're wondering who it would be most tax-efficient to pass your pension to.
If you've inherited a pension and need to pay income tax on it, you can use our Income tax calculator to get an idea of how much it'll cost you.
Do note that if income tax is due on an inherited pension, it'll only need paying when you actually access the money (so this could be once if you take it in one lump sum, or several times if you draw on the money at intervals). Income tax should be deducted by the pension scheme provider.
Pension inheritance FAQs
Can inheriting a pension affect my benefits entitlement?
As your entitlement to benefits is determined by your level of your income and savings (among other things), inheriting a pension could impact this entitlement. In other words, if you start topping up your income by regularly drawing on an inherited pension, you might find you no longer qualify for benefits.
If you want to explore the potential impact, you should speak with a Financial adviser.
You can also use our Benefits calculator to get a rough idea of your benefit entitlement at different income levels.
I've inherited a pension – can the money be passed on again when I die?
Typically, pension pots can be passed on again and again until the funds are exhausted.
For this reason, if you've inherited a pension it's important to name your own beneficiary (which'll determine what happens to any unspent cash left in the pot when you die). Our What happens to my pension when I die? guide explains how to do this.
Be mindful that you might be required to keep the cash from an inherited pension pot in a 'flexi-access drawdown' account if you wish the funds to be passed on again (it's best to check with your scheme provider if this is the case).
If you've inherited a loved one's regular income from a Salary Scheme pension, this will normally stop paying out once you, the original inheritor, die.
I've inherited a pension but am not sure what to do with it?
There can be a lot to consider if you've inherited a pension, particularly around when and how to actually access the money.
For instance, you might be wondering if it's more tax efficient to take the cash in one go or as smaller amounts over many years? Or should you use the money from an inherited pension pot to purchase an annuity for yourself?
You might even be considering combining an inherited pension with your own pension pot you've been building over the years. However, there are both advantages AND disadvantages to combining pension pots.
So, if you've inherited a pension but aren't sure how best to use it, it's worth speaking with a financial adviser.
Can more than one person inherit a pension?
Some pension schemes allow you to name more than one person as a beneficiary if you don't want your pot to go to just one person. It'll depend on your pension scheme though, so you'll need to check with your provider.
Does a pension provider have to pass on my pension to the person I want to inherit?
Technically speaking, there is no legal obligation on a pension provider to give your pension to the person you've named as the beneficiary in your 'expression of wishes' form. However, the expression of wishes form will play a significant role in the provider's ultimate decision.
Where the beneficiary has died or can't be found, the pension provider will try and establish the next most appropriate inheritor (which is where a will could influence a provider's decision).
So in short, it's possible that someone other than your named beneficiary can inherit a pension – though unlikely.
Can I dispute who should inherit a pension?
It's possible to dispute who should inherit a pension, even if the inheritor is named as the pension owner's beneficiary (pension providers aren't legally bound to follow a pension owner's wishes).
If you've got a dispute, you should raise it with the pension provider. Where the dispute remains unresolved, it's possible to escalate the case for free to the Pensions Ombudsman.
What if I don't say who I wish to inherit my pension?
If you've got a pension but don't fill in an 'expression of wishes' form, it's less likely the person you wish to inherit your pension will do so. That's because there'll be no indication to the pension provider of what you want to happen – so it'll have less material to rely on when deciding who inherits your pension.
Need more pension & inheritance help?
Expression of wishes. Nominate who gets your pension when you die.
Aged 40-73? Urgently consider buying missing national insurance years.
Missing out on £1,000s of state pension? More than 200,000 married women could be affected.
General pension help. See our full suite of pension guides.
Ways to reduce Inheritance Tax. Learn how 'gifting' works.
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