When someone dies aged 75 or older, tax on an inherited pension is charged as income tax on the beneficiary, at whatever marginal rate applies to their total income in the year they take the money. That is true whether the pot is paid as a lump sum, kept in drawdown, or used to buy an annuity, and the rate can reach 45%. From 6 April 2027, the same pot may also count toward the deceased’s estate for inheritance tax, which for larger pensions can stack a second layer of tax on top.
Why the Age of 75 Matters
UK pension tax turns on the pension holder’s age at death. Die before 75, and defined contribution death benefits paid to individual beneficiaries are normally free of income tax, provided the scheme is notified and the benefits designated or paid within two years.1GOV.UK. Tax on a Private Pension You Inherit Die at 75 or later, and that tax-free treatment is gone. Every pound the beneficiary draws is taxable income.
The beneficiary’s own age is irrelevant. So is how long the pension had been invested, or who paid in. A death at 74 years and 364 days can produce tax-free benefits; a death the following morning produces income tax on every withdrawal.
The Rates You Will Pay
Money taken from an inherited pension stacks on top of everything else the beneficiary earns that tax year: salary, self-employment, rental income, other pensions. The combined total decides the band. For 2025–26 in England, Wales, and Northern Ireland:
- Up to £12,570 (personal allowance): 0%
- £12,571 to £50,270 (basic rate): 20%
- £50,271 to £125,140 (higher rate): 40%
- Over £125,140 (additional rate): 45%
Those bands apply to taxable income above the personal allowance.2GOV.UK. Income Tax Rates and Personal Allowances Scottish taxpayers use a different set of bands, including starter and intermediate rates, so the arithmetic north of the border is not identical.
The 60% Band Between £100,000 and £125,140
Between £100,000 and £125,140 of total income, the personal allowance is withdrawn at a rate of £1 for every £2 of extra income.2GOV.UK. Income Tax Rates and Personal Allowances The effective marginal rate on income in that window is 60%. A beneficiary earning £90,000 who takes a £40,000 drawdown payment in the same year does not simply pay 40% on the pension money. The slice that pushes total income above £100,000 also strips personal allowance, and the effective cost climbs steeply. This is the single strongest argument for spreading withdrawals across tax years rather than taking a large payment in one go.
Lump Sum, Drawdown, or Annuity
A beneficiary of a defined contribution pension usually has three ways to take the money. All three are taxable when the member died at 75 or older, but the choice controls how much tax is actually paid.1GOV.UK. Tax on a Private Pension You Inherit
Lump Sum
Taking the whole pot at once drops every pound into a single tax year. For a beneficiary with any meaningful other income, a large lump sum almost guarantees that part of the money crosses into higher-rate territory, and a big enough pot will hit the additional rate. A £300,000 pot taken in one payment by someone earning £40,000 would see some of it taxed at 20%, a large portion at 40%, and a slice at 45%. Simplicity is expensive.
Beneficiary Flexi-Access Drawdown
The beneficiary can move the inherited funds into a flexi-access drawdown arrangement, which keeps the pot invested inside the pension wrapper while allowing withdrawals of any size at any time.3GOV.UK. Pensions Tax Manual – PTM072430 This is where planning has real bite. Smaller annual withdrawals can be kept within the basic-rate band, or at least clear of the personal allowance taper. Money left inside the pot continues to grow free of tax until it comes out. The trade-off is investment risk: the value can fall as well as rise.
Annuity
Part or all of the pot can buy an annuity, which pays a guaranteed income for life or for a fixed period. The insurance company deducts income tax from each payment before it reaches the beneficiary. Predictable income, no investment risk, but the capital is gone and the decision is generally irreversible.
Defined Benefit Schemes Do Not Follow the Same Rules
Final salary and career-average schemes work differently. When a member dies, the scheme normally pays a dependant’s pension to a surviving spouse, civil partner, child under 23, or someone else the scheme administrator accepts as financially dependent. A dependant’s scheme pension is taxed as the recipient’s earned income whether the member died before or after 75. The age-75 boundary that dominates defined contribution pensions does not help here. Tax is deducted through PAYE, and there is no option to take a lump sum or move the funds into drawdown: the dependant receives a regular income, typically a percentage of the member’s pension, for as long as they qualify.
How Tax Comes Off and How to Reclaim Overpayments
Pension providers deduct income tax before paying the beneficiary. For regular drawdown or annuity payments they operate PAYE using the beneficiary’s tax code, in the same way an employer would.1GOV.UK. Tax on a Private Pension You Inherit
Lump sums are messier. Providers often lack the beneficiary’s correct tax code when paying a large one-off amount and apply an emergency basis instead. That calculation typically ignores the personal allowance and other income properly, so too much tax comes off. The overpayment can run into thousands of pounds.
You can reclaim the excess from HMRC. Form P53Z applies where someone has flexibly accessed all of their pension or received a serious ill-health lump sum.4GOV.UK. Claim a Tax Refund When You’ve Flexibly Accessed All of Your Pension (P53Z) Form R40 covers people outside self-assessment who need to recover tax deducted from savings and investments.5GOV.UK. Claim a Refund of Income Tax Deducted From Savings and Investments Anyone already inside self-assessment reports the income on their return, and any overpayment is settled through that process. Keep the distribution statement from the provider; HMRC will want the figures.
Passing What Is Left to the Next Person
If a beneficiary who inherited a pension through drawdown dies before the money runs out, the remaining funds can move into a successor’s drawdown fund, and a second-generation beneficiary can continue drawing from the pot.6GOV.UK. Pensions Tax Manual – PTM072410 The tax treatment then depends on the age of the beneficiary who died, not the original member. If that beneficiary dies before 75, the successor can draw tax-free. If they die at 75 or older, the successor pays income tax at their own marginal rate.
Keeping funds inside drawdown preserves this option and can extend across more than one generation, each time resetting the age-75 test against the most recent death. A lump sum ends the chain.
Inheritance Tax on Pensions From 6 April 2027
Most pension death benefits currently sit outside the deceased’s estate for inheritance tax, because trustees of the typical UK scheme have discretion over who receives the money and the funds are not treated as belonging to the deceased at death. Pensions have therefore been one of the most effective ways of moving wealth between generations without a 40% IHT charge.7GOV.UK. Inheritance Tax — Unused Pension Funds and Death Benefits
That ends on 6 April 2027. For deaths on or after that date, unused pension funds and pension death benefits will fall inside the scope of inheritance tax regardless of scheme discretion. Personal representatives, not the pension scheme, will be responsible for reporting and paying any IHT due on the pension assets.7GOV.UK. Inheritance Tax — Unused Pension Funds and Death Benefits
Some categories are carved out. Death-in-service benefits from registered pension schemes are excluded. So are dependant’s scheme pensions from defined benefit arrangements. The existing IHT exemptions for benefits passing to a surviving spouse, civil partner, or registered charity continue to apply.7GOV.UK. Inheritance Tax — Unused Pension Funds and Death Benefits
For anyone inheriting a pension from someone who dies at 75 or older after that date, the combined bill can include inheritance tax on the value of the pot and income tax on every withdrawal. The spouse and civil partner exemption softens the effect for married couples, but a child inheriting a large pot faces both charges. Estate planning for anyone with significant pension wealth should be revisited well before April 2027.