Inheriting a pension: what happens and is there tax to pay?

What to know if you're passing on or inheriting a pension

A pension can often be passed on if there's money left in it at the time of your death. In some cases, pensions can even be inherited tax-free – though this will depend on a number of factors. This guide explains the types of pensions that can be passed on, and whether you're likely to need to pay tax if you're inheriting pension savings.

With thanks to Dr Robin Keyte for sense-checking this guide.

Many pensions can be passed on – some tax-free


Saving into a pension is something many people do, often for decades, so they'll have an income to live off once they retire from working. In that time it's quite possible to save £10,000s, £100,000s or even millions into your pension.

Yet there's no guarantee you'll spend all the money in your pension pot by the time you die. And as some pensions, or at least elements of them, can be passed on, it's wise to think about who you'd want to inherit yours.

Passing on a pension can be complex. For example, while pensions are rarely subject to inheritance tax, it's less clear-cut when it comes to whether the person inheriting it will have to pay income tax. Some won't pay income tax on inherited pensions – meaning it'll be completely tax-free – while others will (and for those the rate will vary depending on their own tax status).

So if you're planning for later life and you're not sure about the best way to pass on your pension – or you've inherited somebody else's pension and don't know what it means for you or the tax implications – it's always sensible to speak with a financial adviser.

In the meantime, here our eight key need-to-knows about passing on a pension, aimed at both those who are passing on a pension and those who've inherited one.

  1. 'Defined contribution' pensions can normally be passed on


    These days, the most common type of pension is a 'defined contribution' pension (also known as a 'money purchase' 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 defined contribution pensions – as are group personal pensions and stakeholder pensions.

    Self-invested personal pensions (SIPPs) – while also a form of defined contribution 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 defined contribution 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 defined contribution 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.

  2. 'Defined benefit' pensions are more restrictive

    'Defined benefit' pensions – often referred to as 'final salary' pensions – used to be commonplace, but employers have steadily moved away from them as they're expensive to run. 

    A defined benefit 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). Defined benefit 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 defined benefit 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 defined benefit 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. 

    Defined benefit 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 defined benefit 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 defined benefit (final salary) 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 defined benefit pension to a defined contribution pension?

      It's sometimes possible to transfer from a defined benefit (final salary) pension to a defined contribution pension. In other words, substitute the regular income you get from a defined benefit pension for a lump sum in a defined contribution pension pot.

      Yet there are serious risks involved with giving up a defined benefit pension, such as giving up your own regular income and forfeiting any other benefits associated with the pension. If you're considering transferring your defined benefit pension to a defined contribution pension as a way to pass on money after you die, it's best to discuss first with a financial advisor.

  3. 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:

      • 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.

      • 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.
  4. 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 after you die (and the pension scheme's rules allow inheriting), then it's important to nominate that person in writing. Fail to do so and your pension provider is far less likely to give it to them.

    Importantly, you shouldn't use a will as the primary means of nominating who gets your pension. 

    Rather, 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.

    A will is still very important. Whilst a will has little bearing on what happens to your pension, writing a will is still very important as it'll help determine 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.

  5. Inheritance tax doesn't normally apply to pensions


    Inheritance tax is unlikely to apply if you pass on a pension.

    That's because while property, savings, investments and assets count towards the value of your 'estate' – the figure used to determine whether or not you pay inheritance tax – the value of your pension doesn't. In other words, pension savings are normally exempt from inheritance tax considerations.

    There are some exceptions to this rule though, such as where:

    • You've moved funds from your pension into a current or savings account.
    • You've made large contributions to your pension whilst seriously ill (and know of the illness) and don't live for a further two years.
    • You've made contributions to somebody else's pension fund.
    • Your pension fund is not part of a trust arrangement.

    In these scenarios, HM Revenue & Customs might treat the funds as part of your 'estate'. If any apply to you, it's worth speaking to a Financial adviser.

  6. 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:

    • You WON'T pay income tax if the pension owner died before reaching 75.
    • You WILL pay income tax if the pension owner died after reaching 75.

    This rule of thumb applies to defined contribution 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.

    Defined benefit (final salary) 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 website.
  7. 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.

  8. You can use a pension to pass on your wealth more tax-efficiently


    Most people don't pay inheritance tax. In fact, only one in 25 families do (that's roughly 4%). Even if your loved ones do face an inheritance tax bill when you die, it's possible to reduce how much they'll pay – including via your pension.

    As mentioned earlier in the guide, savings in your pension don't normally form part of your 'estate' (the figure used to determine whether or not you'll pay inheritance tax). In other words, pension savings are typically exempt from inheritance tax considerations.

    Therefore, if your loved ones face an inheritance tax bill, you could theoretically reduce it by using savings and investments you've got elsewhere to make bigger contributions to your pension (subject to your pension annual allowance). In other words, move cash, assets and investments that are otherwise liable for inheritance tax (in other words, things which do form part of your estate) into an inheritance tax safe zone (your pension).

    As inheritance tax is charged at 40%, using a pension in this way could potentially save you a lot of money. Here's a very simple example:

    Your 'estate' is worth £500,000 and you face paying inheritance tax on £175,000 of it (everyone has a tax-free allowance of £325,000). As inheritance tax is charged at 40%, this is equivalent to £70,000. So, you decide to move £25,000 from a savings account into your pension. This means inheritance tax will now only apply to £150,000 of your estate. As a result, the inheritance tax bill your family faces will drop to £60,000 – a saving of £10,000.

    With the abolition of the pension lifetime allowance, the scope for passing on wealth to loved ones through a pension is now theoretically even greater.

    In reality though, managing an inheritance tax bill is more complex than simply making extra pension contributions, plus it's possible there are more financially sound ways of reducing your inheritance tax bill. Speak to a Financial adviser if you want to explore ways of reducing your inheritance tax liability.

    For more information on how inheritance tax works generally, see our Inheritance tax guide.

    Quick question:

    • How much can I save into my pension each year?

      While there is no cap on how much money you can save into your pension each year, there is a cap on how much money you can save into your pension tax-free each year.

      Generally speaking, the maximum is equivalent to either 100% of your annual income or £60,000, whichever figure is lower – any contributions above this are subject to tax. Be aware some people, such as high earners, have a lower annual allowance.

      Where you've maxed out your annual allowance, you might be able to increase it if you didn't use your full allowance during any of the past three tax years (in other words, carry forward any unused allowance from previous years to this tax year).

      Do note that it's also possible to contribute to other people's pension, such as a partner's or child's. You might consider this if you've already maxed out your own annual allowance and are exploring tax efficient ways of using or passing on your wealth. 

      For more information on pension annual allowances – such as whose allowance is less than £60,000 and how to carry forward allowances – see the website. If you want to explore the pros and cons of contributing to someone else's pension, it's worth speaking to a financial adviser.

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 defined benefit (final salary) 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.

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