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 lump sum and death benefit allowance with any excess subject to income tax), or
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A taxable lump sum — taxed at their marginal rate1 of tax, or
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A tax-free income * (if your pension plan offers it). This could either be income from a beneficiary's flexi-access drawdown plan or from a lifetime annuity. Income is tax free if funds are designated into drawdown or a lifetime annuity is set up within a two-year period.
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A taxable income (if your pension plan offers it) — taxed at their marginal rate1. This could either be income from a beneficiary's flexi-access drawdown plan or from a lifetime annuity.
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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 if you die 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 (up to your available lump sum and death benefit allowance with any excess subject to income tax), or
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A taxable lump sum - taxed at their marginal rate1 of tax.
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A tax-free income *. This could either be income from a beneficiary's flexi-access drawdown plan or from a lifetime annuity. Income is tax free if funds are designated into drawdown or a lifetime annuity is set-up within a two-year period.
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A taxable income - taxed at their marginal rate1. This could either be income from a beneficiary's flexi-access drawdown drawdown plan or from a lifetime annuity.
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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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Ongoing annuity payments tax free.
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Ongoing annuity payments taxed at their marginal rate1.
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Remaining annuity payments tax free.
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Remaining annuity payments taxed at their marginal rate1.
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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.
These are the most common examples of how death benefits from pensions are taxed. However, there are circumstances, for example, paying a lump sum death benefit to someone who is not an individual (for example, a company), where an additional tax charge, called the special lump sum death benefit charge, would apply.
State Pension
To find out more details about what happens to your State Pension when you die, visit Moneyhelper.
Important
This information is based on our understanding of current taxation law and HMRC practice, which may change.
*For a lump sum to be tax free, it must be paid within two years of (in most cases) the date the plan administrator was notified of the member's death, otherwise it will be subject to income tax. For drawdown income or an annuity to be paid tax free, the funds must be designated into beneficiaries' drawdown, or the annuity set up, within two years of (in most cases), the date the plan administrator was notified of the member's death. If designated/set up outside this two-year period, income tax will apply.
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 – there may be a charge for this.
1 The marginal rate of tax is the rate of income tax payable on your next pound of income. for practical purposes it could be thought of as the highest rate of tax you'll pay on your income.