Tax on a pension you pass on or inherit

If you want to include a pension in your will, or if you get a pension from someone who has died, there may or may not be tax to pay, depending on the individual circumstances and the type of pension involved.

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Death Benefits from a State Pension

Your basic State Pension is paid only to you, and can't be passed on to someone else when you die. However, if you chose to put off claiming your State Pension (deferral), your surviving spouse or civil partner may be entitled to some of the deferral amount you had built up.

If you have contributed towards an additional State Pension your spouse or civil partner may get some of this additional pension when you die. This additional State Pension was formerly known as the State Earnings-Related Pension Scheme (SERPS) or State Second Pension.

They may also be able to increase their basic State Pension by using your qualifying years if they don’t qualify for the full amount. If your spouse or civil partner is over State Pension age when you die, they should contact the Pension Service to check what they can claim. If they're under State Pension age when you die any State Pension they may inherit from you will be included when they claim their own State Pension

Nominate someone to get your pension if you die - GOV.UK website (Opens new window)

Tax on death benefits received from a deceased's State Pension

Any increases in your income that you receive as a result of the death of your spouse or civil partner will count as part of your taxable income in retirement.

Do you have to pay tax in retirement?

Taxable and non-taxable income at a glance

Do you need to complete a tax return?

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Death benefits from a workplace, personal or stakeholder pension

Depending on your pension rules, a number of benefits may be payable when you die, including:

  • a return of your contributions
  • a lump sum
  • a pension for your spouse, civil partner or another dependant

If you have pension savings in a workplace pension scheme but you no longer work for the employer the scheme may choose to do no more than pay a refund of your pension contributions.

The payment of death benefits on most pension schemes is 'discretionary' and therefore won't be part of the estate for Inheritance Tax purposes. Discretionary means that the pension provider is free to decide who to pay the death benefit to. Often they'll follow the deceased's wishes, although they don't have to. If the lump sum isn't discretionary there may be Inheritance Tax to pay. Your pension provider will be able to give you details about your pension. Other tax liabilities are summarised below.

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Tax on death benefits from a workplace pension

If you die before starting to draw your workplace pension

Most workplace pensions provide a 'Death-in-Service' benefit, similar to a life assurance policy. This means that if you die before starting to draw your workplace pension a lump sum is paid to a chosen person (known as the 'beneficiary').

Provided it is paid within 2 years of the scheme administrator becoming aware of your death, the money can be paid free of Income Tax if it's not worth more than your available 'lifetime allowance' (£1.25 million in tax year 2014 to 2015). If the amount of the lump sum - plus the value of any other registered pension scheme benefits - exceeds the lifetime allowance, the excess is taxed at 55%. This tax is paid by the beneficiary. If the lump sum is paid more than 2 years after the scheme administrator became aware of your death the lump sum will be an unauthorised payment and whoever receives it will have to pay a 55% tax charge on the lump sum.

If you die at age 75 or older the entire lump sum will be taxed at 55%. The pension scheme administrator is responsible for paying this tax charge and they'll normally deduct the tax before paying the lump sum.

If you die in service, some pension schemes pay a dependants' pension. A dependants' pension counts as taxable income for the beneficiary.

If you die after you start to draw your workplace pension

If you die after you start to draw your workplace pension any pension protection or annuity protection lump sum death benefit paid following your death will be taxed at 55%. This will be paid by the scheme administrator.

If a dependant's pension is provided it counts as taxable income for that dependant.

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Tax on death benefits from a personal or stakeholder pension

If you die before taking any benefits

If you die before taking any benefits, the death benefits are normally paid as a lump sum. This usually consists of the return of the pension fund together with the proceeds of any life assurance.

Provided it is paid within 2 years of the scheme administrator becoming aware of your death, the money can be paid free of Income Tax if it's not worth more than your available 'lifetime allowance' (£1.25 million in tax year 2014 to 2015). If the amount of the lump sum - plus the value of any other registered pension scheme benefits - exceeds the lifetime allowance, the excess is taxed at 55%. This tax is paid by the beneficiary. If the lump sum is paid more than 2 years after the scheme administrator became aware of your death the lump sum will be an unauthorised payment and whoever receives it will have to pay a 55% tax charge on the lump sum.

Death benefits can also be used to provide dependants' pensions instead of being taken as a lump sum. If a dependant's pension is provided this counts as taxable income for that dependant.

If you die after taking benefits

If you die after taking benefits, any death benefits payable as pension income to a dependant will be taxed as income in the normal way.

If the pension scheme provided for a lump sum payment this will be taxed at 55%. This is payable by the scheme administrator.

Tax on death benefits from 'Alternatively Secured Pensions' (ASPs)

On 6 April 2011 Alternatively Secured Pensions ceased and became a form of drawdown pension. They had been available from 6 April 2006 as an alternative to buying an annuity by age 75. Any remaining money in your drawdown pension pot at the time of your death can be used to provide a dependant's pension, payment of a lump sum or a mixture of both. Income Tax of 55% is payable on the lump sum. 

Drawdown pension

Tax on workplace, personal or foreign pensions

Tax on retirement annuities

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More useful links

What to do about tax and benefits after a death

Tax when you inherit money, assets or property

Inheritance Tax

Tax on your State Pension

Tax if you take your State Pension later on

What happens to my pension when I die? - The Pensions Advisory Service website (Opens new window)

What happens to your pension savings when you die

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