Tax When You Inherit a Pension UK 2026/27

Quick answer

When you inherit a UK pension in 2026/27, the tax you pay depends almost entirely on two things: how old the pension holder was when they died, and whether you take the money as a lump sum or as income. A third factor — inheritance tax on the pot itself — is about to change dramatically from April 2027.

For now, most defined-contribution pensions (personal pensions, SIPPs, modern workplace pots) pass to your nominated beneficiaries outside your estate, so they do not normally attract the 40% inheritance tax. But income tax may still apply to what the beneficiary draws, governed by the deceased's age at death. This guide walks through both taxes, the looming 2027 reform, and how to take an inherited pension without handing HMRC more than you need to.

The two taxes that can apply

People often assume "inheriting a pension" is a single tax event. It is not. Two distinct charges can bite:

1. Income tax — on what the beneficiary withdraws, depending on the age at which the original holder died.
2. Inheritance tax — on the value of the pot as part of the deceased's estate. For 2026/27 this rarely applies to defined-contribution pensions, but from April 2027 it usually will.

Understanding which one you are facing — and when — is the whole game.

Income tax: the age-75 rule

The single most important factor for income tax on an inherited DC pension is whether the holder died before 75 or at 75 or older.

Death before age 75

If the pension holder died before their 75th birthday, money you take from the inherited pot is normally free of income tax, whether you take it as a lump sum or as beneficiary drawdown. This is subject to the Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100 — tax-free death benefits above that allowance are taxed as the beneficiary's income.

There is also a practical condition: the scheme administrator generally must be told and the benefits designated within two years of being notified of the death, or tax-free treatment can be lost. Beneficiaries should not sit on the paperwork.

Death at 75 or older

If the holder died at 75 or over, the picture flips. Everything you draw is taxed as your income in the year you receive it, at your marginal rate — 20%, 40% or 45% (or the Scottish equivalents). There is no tax-free portion for the beneficiary.

This is where the lump-sum-versus-drawdown decision becomes financially significant, because a single large withdrawal can be taxed far more heavily than the same pot drawn gradually. Model the effect on your own income with the

.

Worked example: a £200,000 inherited pot, death at 78

Sarah inherits her father's £200,000 SIPP. He died aged 78, so every withdrawal is taxed as Sarah's income. Sarah earns £45,000 from her job, sitting just inside the basic-rate band.

Option A — take it all as one lump sum. The £200,000 stacks on top of her £45,000 salary, taking her total income to £245,000 for the year. Most of the pot is taxed at 40%, a slice at 45%, and the windfall also wipes out her personal allowance through the £100,000 taper. The effective tax bite on the pension money runs well above 40%.

Option B — beneficiary drawdown over several years. Sarah leaves the pot invested and draws, say, £5,000 a year. That £5,000 sits in her basic-rate band and is taxed at 20%. Over time she draws far more of the pot at 20% than 40%, and never loses her personal allowance.

The difference between the two approaches on a £200,000 pot can easily exceed £40,000 in tax. Where the holder died at 75 or over, drawdown almost always beats a single lump sum for a working-age beneficiary.

Inheritance tax on pensions: the 2026/27 position

For deaths in 2026/27, most defined-contribution pension pots are held in trust or under scheme discretion and fall outside the deceased's estate. That means they are not added to the estate's value and do not attract the 40% inheritance tax that applies above the nil-rate bands.

For context, the standard nil-rate band is £325,000, plus a residence nil-rate band of up to £175,000 where a home passes to direct descendants — so a couple can often pass on up to £1 million before IHT bites on the rest of the estate. Crucially, in 2026/27 the pension usually sits on top of those allowances, untouched by IHT. You can see how the estate maths works with the

.

This is exactly why pensions have become such a powerful estate-planning tool — and exactly what the government is now changing.

The April 2027 change: pensions enter the estate

The big shift on the horizon: from 6 April 2027, the government plans to bring unused pension funds and most lump-sum death benefits into the value of the estate for inheritance tax purposes.

In plain terms, a pot that today passes IHT-free could, from April 2027, be added to everything else the person owned and taxed at 40% on the portion above the available nil-rate bands. For families with substantial pots that had been deliberately preserved to pass on, this is a material change.

Why the date of death matters so much

Because the rules pivot on both the age at death and the tax year of death, two otherwise identical families can face very different outcomes:

• Holder dies in 2026/27, aged 70: pot usually outside estate (no IHT), withdrawals usually income-tax-free. The most favourable outcome.
• Holder dies in 2026/27, aged 80: pot usually outside estate (no IHT), but withdrawals taxed as the beneficiary's income.
• Holder dies in 2027/28, aged 80: pot likely in the estate (potential 40% IHT) and withdrawals taxed as income — the worst case.

None of this is a reason to make rushed decisions, but it explains why the timing of the reform is the subject of so much planning discussion.

Defined-benefit and other scheme types

This guide focuses on defined-contribution pots, which are where the lump-sum/drawdown choices arise. Defined-benefit (final salary) schemes are different: they typically pay a survivor's pension to a spouse or dependant — say half the member's pension — which is taxed as the recipient's income, rather than handing over a transferable pot. Some pay a lump-sum death benefit instead. If you inherit a DB entitlement, check the scheme rules carefully because the options are far more constrained than with a SIPP.

How beneficiary drawdown works

When you inherit a DC pension you usually have three broad routes:

• Lump sum — take the whole pot at once. Simple, but where death was at 75+ it can trigger a large income-tax bill in a single year.
• Beneficiary drawdown — keep the pot invested in your own beneficiary account and draw income flexibly over time, controlling which tax bands you fall into.
• Beneficiary annuity — exchange the pot for a guaranteed income.

Beneficiary drawdown is the most flexible and, for a working-age beneficiary inheriting from someone who died at 75+, usually the most tax-efficient because it lets you spread withdrawals across years and bands. You can model the take-home impact of adding pension income to a salary with the

.

Reporting an inherited pension to HMRC

Where withdrawals are taxable (death at 75+), the pension provider normally operates PAYE on the payments, often using an emergency tax code on the first withdrawal — which can over-tax you and require a reclaim. If you have other income or the PAYE figure is wrong, you may need to reconcile it through Self Assessment or by contacting HMRC for a refund. Where death was before 75 and within the LSDBA, withdrawals are typically tax-free and need no reporting by the beneficiary.

For inheritance tax (relevant from April 2027 onward), it is the estate's executors who report and pay IHT, not the individual pension beneficiary — though the pension provider and executors will need to coordinate.

Practical steps if you inherit a pension

1. Find out the age at death. This single fact determines your income-tax position.
2. Check the scheme type — DC pot, or a DB survivor's pension with fixed rules.
3. Do not rush a lump sum if death was at 75+. Consider drawdown to spread the tax.
4. Act within the two-year window to preserve any tax-free treatment where death was before 75.
5. Watch the April 2027 reform if the estate is large — it may change the calculus for IHT.
6. Reclaim emergency tax if your first withdrawal was over-taxed under PAYE.

Putting it all together

Inheriting a pension in 2026/27 is, for most people, still tax-favourable: defined-contribution pots usually escape inheritance tax, and whether you pay income tax turns on the age-75 rule. The two levers within your control are timing and method — taking a large pot gradually through drawdown rather than in one lump sum can save tens of thousands where death occurred at 75 or over. Keep a close eye on the April 2027 reform, which is set to pull unused pensions into the estate for IHT and could create a genuine double-tax exposure on big pots. Model the income-tax effect of any withdrawal with the

and the estate position with the .

Quick reference: the 2026/27 numbers

• Death before 75: beneficiary withdrawals usually income-tax-free (within the £1,073,100 LSDBA).
• Death at 75 or over: withdrawals taxed as beneficiary's income at 20/40/45%.
• IHT on DC pensions (2026/27): usually none — pot sits outside the estate.
• Standard nil-rate band: £325,000; residence nil-rate band: up to £175,000.
• IHT rate above allowances: 40%.
• April 2027: unused pensions planned to enter the estate for IHT.
• Two-year rule: designate benefits within two years to preserve tax-free treatment.

Common mistakes to avoid

• Taking the whole pot as a lump sum when death was at 75+, pushing yourself into 40% or 45% — and possibly the £100,000 personal-allowance taper.
• Missing the two-year window to designate benefits after a death before 75, losing tax-free status.
• Assuming pensions are always IHT-free — that is the 2026/27 position, not the post-April-2027 one.
• Forgetting emergency tax on first withdrawals and never reclaiming the overpayment.
• Confusing DB and DC rules — a final-salary survivor's pension behaves nothing like an inherited SIPP.

An inherited pension can be one of the most valuable things you ever receive — and one of the most easily over-taxed. Establish the age at death, resist the urge to cash out in one go, and watch the 2027 reform closely. Model the numbers with the

and the before you decide how to draw.

This article is general information, not financial advice. Figures use 2026/27 UK rules and reflect the government's stated intention to include pensions in estates from April 2027, which may change. Pension and inheritance tax rules are complex — consider regulated advice for large pots.