How is a pension death benefit taxed for a nominee compared to a dependant?

Full answer

Pension death benefit terminology -- 'dependant,' 'nominee,' and 'successor' -- often causes confusion, but for tax purposes the age-75 rule applies identically regardless of which category the beneficiary falls into; the distinction mainly matters for who is legally entitled to inherit and set up ongoing drawdown, not for the tax rate itself. **What is a 'dependant'** A dependant is typically a spouse, civil partner, child under 23 (or older if financially dependent due to disability), or someone who was financially dependent on the pension holder at the time of death (such as a cohabiting partner who relied on the deceased's income). Historically, only dependants could inherit pension drawdown rights directly. **What is a 'nominee'** A nominee is someone the pension holder has specifically nominated (named) to receive pension death benefits, who does NOT need to be a financial dependant at all -- this could be an adult child who is financially independent, a sibling, a friend, or anyone else the pension holder chooses to name. The introduction of the nominee category (alongside the older dependant category) significantly widened who could inherit pension benefits directly, rather than pension wealth only being able to pass to a narrow class of financially dependent relatives. **What is a 'successor'** A successor is a further beneficiary nominated by a dependant or nominee who has already inherited pension benefits, to receive anything remaining in the inherited pension after THAT beneficiary also dies -- allowing pension wealth to potentially cascade down through multiple generations (e.g. from the original pension holder, to their nominated adult child as nominee, to that child's own nominated successor), with the tax treatment at each stage still governed by the age of the person who died most recently in the chain (i.e., whether the PREVIOUS holder in the chain was over or under 75 when they died, not the age of the original pension saver from decades earlier). **The tax rule is the same for all three categories** Regardless of whether the beneficiary is classified as a dependant, nominee, or successor, the fundamental Income Tax rule is identical: if the person whose pension is being inherited (the previous holder in the chain) died before age 75, withdrawals by the beneficiary are tax-free (subject to the 2-year payment window); if that previous holder died at or after 75, withdrawals are taxed at the beneficiary's own marginal Income Tax rate. **Worked example** A pension holder dies at age 70 (before 75) and nominates her financially independent adult son (a 'nominee,' since he is not a dependant) to inherit her £300,000 pension pot. Because she died before 75, he can withdraw from the inherited pension completely tax-free, exactly as a dependant in the same situation would be able to -- being a 'nominee' rather than a 'dependant' does not change this favourable tax treatment at all; it only reflects that he was not financially dependent on her, which under the current rules is no longer a barrier to inheriting tax-efficiently. **Why the terminology still matters practically** While tax treatment does not differ between the categories, the terminology affects who the pension SCHEME will actually allow to inherit drawdown rights (following the pension holder's nomination on record with the scheme) and how far down a chain of successive beneficiaries pension wealth can continue to be passed while retaining its beneficiary-drawdown tax treatment -- pension holders should keep their nomination (expression of wishes) forms up to date with their scheme to ensure the intended people are recognised in whichever category applies, since an out-of-date nomination can complicate or delay how benefits are eventually paid out.

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