What Is an Inherited Pension?

When someone with a pension dies, what happens to their remaining pension pot depends on the type of pension they held, their age at death, and whether a beneficiary was nominated. In many cases, the remaining funds can be passed on to a loved one. This is known as an inherited pension.

This guide explains what an inherited pension is, the tax rules that apply, the differences between pension types, and how to make sure your pension is passed on efficiently.

What Is a Pension?

A pension is a long-term savings product designed to help people save for retirement. In the UK, there are three main types:

• The State Pension, paid by the government

• Defined benefit pensions (e.g. final salary or career average schemes)

• Defined contribution pensions, where individuals save into a pot that is invested over time

Only the second two types – defined benefit and defined contribution – are relevant when it comes to inheritance planning, as the State Pension typically stops when the recipient dies.

What Happens When You Inherit a Pension?

When someone dies, the remaining value of their pension can often be passed to a spouse, civil partner, or other nominated beneficiary. The form this takes depends on the pension type:

• A lump sum death benefit

• A drawdown account (continuing to take income)

• An annuity (if the deceased had purchased a joint-life or guaranteed annuity)

You can usually choose to take the pension as a lump sum, a regular income, or transfer it to your own pension account. The choice you have may also be shaped by whether the original pension holder had reached age 75.

Defined Benefit Pensions After Death

With a defined benefit pension (such as a public sector or final salary scheme), there isn’t a pot of money to inherit. Instead, the scheme may provide:

• A survivor’s pension, often a percentage of the original income

• A lump sum death benefit (in some cases)

• Dependants' pensions for children under a certain age

The survivor’s pension is usually paid to a spouse, civil partner, or financially dependent partner, but rules vary by scheme.

Defined Contribution Pensions After Death

Defined contribution pensions are more flexible and typically allow the full remaining pot to be passed on. Beneficiaries can usually choose between:

• Taking the whole pot as a lump sum

• Entering flexi-access drawdown, taking income from the pot over time

• Using the pot to buy an annuity

The tax treatment depends on the age of the pension holder at death.

What Happens If I Die Before Age 75?

If the pension holder dies before reaching 75, the remaining pension pot can usually be passed on tax-free, as long as:

• The funds are designated to beneficiaries within two years of the pension provider being notified of the death

• The pension was in drawdown, uncrystallised, or annuity income had not started

Beneficiaries don’t pay income tax on withdrawals or lump sums, but the pot is still subject to Lifetime Allowance rules if the death occurred before April 2023.

What Happens If I Die After Age 75?

If the pension holder dies after the age of 75, any money withdrawn by beneficiaries is subject to income tax at the beneficiary’s marginal rate. For example, if a beneficiary is a basic-rate taxpayer, they’ll pay 20 percent on any pension withdrawals. Higher earners pay 40 or 45 percent.

This applies whether the funds are taken as income or a lump sum. However, there is no longer any Inheritance Tax on defined contribution pensions passed this way.

What About Inheritance Tax on Pensions?

Pensions are not normally included in your estate for Inheritance Tax purposes, especially if you nominate a beneficiary and the pension stays outside of your will.

However, lump sums may be taxed if:

• No beneficiary was nominated and the estate receives the funds

• A lump sum is paid to someone not classed as a dependant or financial nominee

This is why nominating beneficiaries directly with your pension provider is so important.

Nominating a Beneficiary

Every defined contribution pension allows you to name one or more beneficiaries. This tells your provider who should receive the money when you die. You can usually change this nomination at any time.

If you don't name a beneficiary, the provider may pass the pension to your estate, which could result in tax charges and delays. Make sure your nomination is up to date, especially if your personal circumstances change (e.g. divorce, remarriage, new children).

What Happens to the State Pension?

The State Pension cannot be inherited, but in some cases a spouse or civil partner may be eligible for:

• A share of your Additional State Pension (from older systems)

• Increased payments through bereavement benefits

• Inheriting part of your protected payment if you reached State Pension age before 6 April 2016

There is no cash lump sum or full inheritance of the main State Pension after death.

Final Thoughts

An inherited pension can provide valuable financial support to your loved ones, but the rules can be complex. Defined contribution pensions offer the most flexibility and potential tax advantages, especially if the holder dies before 75. Defined benefit schemes often offer survivor pensions, but with less control over the structure or amount.

To make sure your pension goes where you want it to, nominate beneficiaries with your pension provider, review your choices regularly, and seek professional advice if you have a complex estate or large pension pot. Early planning ensures your wishes are honoured and your beneficiaries avoid unnecessary tax.