There are a number of factors that determine how death benefits from pensions are taxed:
How are death benefits from pensions taxed?
If you die before taking benefits from your pension
Your pension pot can be paid to your beneficiaries as:
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Death before age 75
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Death after reaching age 75
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A tax-free lump sum (up to your available lifetime allowance with any excess subject to a 55% tax charge), or
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A taxable lump sum - taxed at their marginal rate of tax, or
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A tax-free income (if your pension plan offers it).
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A taxable income - taxed at their marginal rate.
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There will normally be no inheritance tax to pay.
If you die after taking benefits from your pension
The tax that applies after taking benefits from your pension depends on the benefit option you're receiving and your age when you die.
Drawdown
Your remaining drawdown fund can be paid to your beneficiaries as:
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Death before age 75
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Death after age 75
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A tax-free lump sum, or
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A taxable lump sum - taxed at their marginal rate of tax.
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A tax-free income.
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A taxable income - taxed at their marginal rate.
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There will normally be no inheritance tax to pay.
Annuity
Your beneficiary can receive:
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Death before age 75
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Death after reaching age 75
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Joint-life annuity
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Ongoing annuity payments tax free.
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Ongoing annuity payments taxed at their marginal rate.
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Guaranteed term annuity
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Remaining annuity payments tax free.
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Remaining annuity payments taxed at their marginal rate.
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The income payments will normally stop when you die if you don’t buy a joint-life annuity or a guaranteed annuity.
State Pension
You can find details of what happens to your State Pension when you die at gov.uk/state-pension/further-information
Important
This information is based on our understanding of current, taxation law and HMRC practice, which may change.
It’s important to review your own personal circumstances as exceptions to the above may apply in certain circumstances, and different plans and providers offer different product options. Please speak to a financial adviser if you need further information.