Dying before or after 75: inherited pension tax explained

Start with the benefit, not just the birthday

A pension can leave an unused investment pot, a lump sum, an annuity or a continuing dependant's pension. These do not all follow identical tax rules. For benefits following the member's death, the member's age when they died usually matters for Income Tax; the beneficiary's age when receiving money is not the age-75 test.

The scheme also determines which benefits and payment options are available. A defined benefit pension promising a continuing income should not be treated as an investment pot that can always be left in full to anyone.

If the member dies before 75

Many defined contribution death benefits can be paid free of Income Tax, but conditions apply. Relevant lump sums must normally be paid within the applicable two-year period. That period starts when the scheme administrator knew, or could reasonably have been expected to know, of the death, whichever was earlier.

Certain lump sums are tested against the member's remaining lump sum and death benefit allowance. The standard allowance is £1,073,100 for 2026/27, with protections and transitional rules possible. Earlier benefits may have used part of it. The taxable excess is not automatically exempt because death occurred before 75.

Inherited drawdown has its own conditions and timing rules. Where a deadline applies to designating funds into beneficiary drawdown, it is not necessarily a deadline for withdrawing the entire pension. Ask the provider to identify the relevant benefit, deadline and tax treatment.

If the member dies at 75 or older

Payments to an individual beneficiary are usually subject to their Income Tax rates. Taxable pension payments join their other taxable income in the year received, so there is no universal beneficiary tax percentage. The provider normally deducts tax through PAYE. Separate rules can apply to trusts and other recipients.

Some benefits, including dependants' scheme pensions and trivial commutation death-benefit lump sums, are normally taxable regardless of the member's age. Older drawdown arrangements and annuities can also need separate treatment.

How April 2027 fits in

For deaths from 6 April 2027, the Inheritance Tax rules must be considered separately at any age. A payment may satisfy the conditions for Income Tax exemption and still come from pension value included in the estate. Conversely, an Inheritance Tax exemption does not necessarily remove Income Tax on subsequent payments.

Before interpreting a tax estimate, establish the date and age at death, pension and benefit type, relevant deadlines, allowance records, recipient and any Inheritance Tax adjustment. The phrase 'tax-free before 75' leaves out too much to be a reliable description of every inherited pension.