Inheriting a Pension Pot: How It's Taxed in 2026/27
Whether an inherited defined contribution pension is tax-free or taxed at your marginal rate depends on the age the original owner died. The rules, the death benefit nomination and how to claim, explained for 2026/27.
Quick answer
The single most important fact determining how an inherited pension is taxed is the age of the person who died — under 75, and withdrawals are generally tax-free; 75 or over, and withdrawals are taxed as the beneficiary's income at their normal marginal rate. Everything else — lump sum, drawdown, annuity — is a choice about how to take the money, not whether tax applies.
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Pension calculatorThe age-75 rule
Most UK defined contribution pensions apply a simple age test at the date of death:
- Death before age 75: the beneficiary can generally take the inherited pot as a lump sum or as income (inherited drawdown) completely free of Income Tax, up to relevant allowances.
- Death at age 75 or over: withdrawals by the beneficiary are taxed as income at their own marginal Income Tax rate — so a higher-rate taxpayer inheriting a pot from someone who died at 80 would pay 40% tax on amounts withdrawn that fall in their higher-rate band.
This makes the timing of death — something nobody can control — the deciding factor, which is why pension death benefit planning (nomination forms, and sometimes deliberately not touching a pension pot in favour of other assets) is a common estate-planning consideration.
Inheritance Tax: the position is changing
Most defined contribution pensions sit in a discretionary trust structure that has historically kept them outside the deceased's estate for Inheritance Tax purposes — a major reason pensions are often the last asset drawn down in retirement planning. From April 2027, planned reforms bring unused pension funds and certain death benefits within scope of Inheritance Tax. Anyone dealing with an inherited pension around that transition should check the specific rules in force at the date of death, since this is a genuine change to long-standing practice.
Pension death benefits guideWho actually decides who inherits
Unlike most assets, a pension death benefit usually isn't distributed according to the will — pension scheme trustees have discretion over who receives it, informed by the deceased's expression of wish (or nomination) form. This discretion is what, in most cases, keeps the pension outside the estate for current Inheritance Tax purposes, but it also means an out-of-date nomination form (naming an ex-spouse, for example) can create real complications, even though trustees aren't strictly bound by it.
How to take it
Beneficiaries typically have the same range of options the original member would have had: a full lump sum, ongoing inherited drawdown (keeping funds invested, withdrawing as needed), or converting to an annuity — the age-75 tax rule applies regardless of which option is chosen.
Bottom line
Find out the age at which the original pension holder died before assuming anything about tax — it's the single fact that determines whether the inherited pension is a tax-free windfall or taxable income at your marginal rate.
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Frequently asked questions
Is an inherited pension pot always tax-free?
No — it depends on the age the original pension holder died. If they died before age 75, the inherited pot can generally be taken as a lump sum or income entirely free of Income Tax. If they died aged 75 or over, the beneficiary pays Income Tax at their own marginal rate on withdrawals.
Does the pension form part of the estate for Inheritance Tax?
Most defined contribution pensions are held in a trust structure outside the estate, so historically they've fallen outside Inheritance Tax entirely. From April 2027, unused pension funds and death benefits are due to be brought within the scope of Inheritance Tax under planned reforms — check the current position at the time of the death, as the rules are changing.
Who decides who inherits the pension pot?
The pension scheme trustees or administrators normally have discretion over who receives death benefits, guided by (but not strictly bound by) the deceased's expression of wish or nomination form — which is why keeping this form up to date is more important for pensions than it is for assets covered by a will.
Can I take the inherited pension as an annuity, drawdown, or lump sum?
Beneficiaries generally have the same flexibility as the original member would have had — inherited drawdown (keeping the money invested and taking income as needed), a lump sum, or purchasing an annuity — with the age-75 rule determining whether withdrawals are tax-free or taxed at the beneficiary's marginal rate.
What if the pension was already in drawdown when the person died?
A pension already in flexi-access drawdown can usually continue in inherited drawdown for the beneficiary, under the same tax treatment rules based on the deceased's age at death, without needing to be cashed out first.
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