How pension death benefits are taxed under the current rules

Under the current rules, most pension death benefits are remarkably lightly taxed, but only if you keep two separate taxes straight. Inheritance tax usually does not apply at all today: most defined contribution pensions are paid out at the discretion of the scheme, so the money sits outside your estate. Income tax depends entirely on age at death: if the member dies before 75, benefits are usually paid tax free; if the member dies at 75 or over, the beneficiary pays income tax at their own marginal rate on what they receive.

That two-layer position is the "before" picture. From 6 April 2027, unused pension funds and death benefits will be counted in the estate for inheritance tax, which rewrites the first layer while leaving the income tax layer in place. This guide explains exactly how the current law works, because it still governs every death before that date, and because you cannot judge what 2027 changes without knowing the baseline. To see how your own position differs either side of the deadline, our free pensions and IHT 2027 estimator models both sets of rules in about two minutes.

Pension tax rules apply UK wide. We use England and Wales terminology for estates and probate; the pension treatment itself is the same in Scotland and Northern Ireland. Nothing here is personal tax or financial advice, and we do not recommend pension products or transfers. For decisions about your own pension, speak to a regulated financial adviser.

Two taxes, two different questions

Most confusion about inherited pensions comes from blending two questions that current law answers separately.

	Income tax	Inheritance tax
Who pays it?	The beneficiary, on what they receive	The estate (via the personal representatives)
What decides it?	The member's age at death (before 75, or 75 and over)	Whether the pension counts as part of the estate
Current position	Tax free before 75 (within allowances and time limits); marginal rate at 75 or over	Usually not charged: discretionary death benefits sit outside the estate
From 6 April 2027	Unchanged	Unused pension funds and death benefits enter the estate for IHT

Hold that grid in mind and the rest of the current rules fall into place. We take each tax in turn.

Layer one: why pensions currently escape inheritance tax

Inheritance tax is charged on your estate: broadly, everything you own or are treated as owning at death, above your available nil-rate band and other thresholds. The reason most pensions escape is simple but easily missed: legally, you do not own your unused pension fund in the way you own your house or savings.

In a typical modern defined contribution scheme, death benefits are paid at the discretion of the scheme trustees or provider. You complete a nomination form (often called an expression of wish) saying who you would like to benefit, and in practice schemes almost always follow it. But because the final decision rests with the scheme rather than with you or your will, HMRC treats the fund as never forming part of your estate, so inheritance tax does not bite. HMRC's Inheritance Tax Manual sets out this treatment of discretionary death benefits at IHTM17052.

The nomination form does the work your will cannot

A common and expensive misunderstanding is assuming your will controls your pension. Under a discretionary scheme it does not. The scheme decides, guided by your nomination form and the scheme rules. Practical consequences under current law:

• Keep nominations current. An out-of-date form naming a former spouse is a classic problem. Review it after marriage, divorce, births and deaths.
• Directing benefits to your estate can backfire. If benefits must be paid to your estate (a binding direction, or certain older contract terms), they lose the discretionary route and can fall inside the estate for inheritance tax even under current law.
• Nomination also affects income tax flexibility. Whether a beneficiary can use flexible drawdown rather than taking a lump sum can depend on being nominated and on what the scheme offers.

How that discretion works in detail, and what happens to it after the reform, is covered in our companion piece on discretionary pension trusts and the 2027 change.

Defined benefit schemes are different

Defined benefit (final salary) schemes generally do not leave a pot to inherit. They typically pay a survivor's pension to a spouse, civil partner or dependant, taxed as that person's income, and sometimes a lump sum if death occurs early. The current-law inheritance tax position is usually still favourable because lump sums are normally paid under discretion, but the mechanics differ enough that we cover them separately in defined benefit vs defined contribution pensions and inheritance tax.

Layer two: income tax and the age 75 divide

Whatever the inheritance tax position, the beneficiary's own income tax treatment turns on one fact: was the member under 75 when they died? The rules are set out on gov.uk's guide to tax on a private pension you inherit.

Death before 75: usually tax free

If the member dies before their 75th birthday, defined contribution death benefits can normally be paid free of income tax, whether taken as a lump sum, as beneficiary drawdown or as an annuity. Two conditions do the heavy lifting:

1. The two year rule. Funds must generally be designated to the beneficiary, or the lump sum paid, within two years of the scheme first being notified of (or reasonably knowing about) the death. Miss the window and the benefits become taxable at the beneficiary's marginal rate despite death before 75. HMRC's Pensions Tax Manual covers the detail at PTM073000.
2. The lump sum and death benefit allowance. Since the lifetime allowance was abolished, tax-free lump sums on death are measured against the lump sum and death benefit allowance, £1,073,100 in 2026/27 (this allowance also covers serious ill-health lump sums). Lump sums above it are taxed at the recipient's marginal rate. For comparison, the standard tax-free lump sum in lifetime (the lump sum allowance) is capped at £268,275.

Death at 75 or over: the beneficiary's marginal rate

If the member dies at 75 or over, everything the beneficiary draws is taxed as their own income at their marginal rate: 20%, 40% or 45% depending on their total income in the year (Scottish income tax rates apply to Scottish-resident beneficiaries). Three practical points follow:

• Lump sums can be costly. Taking a large inherited pot in one go can push a basic rate taxpayer deep into higher or additional rate tax for that year.
• Drawdown spreads the tax. Where the scheme offers beneficiary drawdown, the beneficiary can leave funds invested and draw gradually, paying tax only as money comes out.
• The rate is the beneficiary's, not the deceased's. A non-taxpaying grandchild inheriting a pension pays much less tax on withdrawals than an additional rate taxpaying child would on the same pot.

What changes on 6 April 2027 (and what does not)

From 6 April 2027, most unused pension funds and death benefits will be included in the estate for inheritance tax. The government's technical note on inheritance tax on pensions confirms the key features:

• Personal representatives (executors or administrators) become legally responsible for reporting and paying any inheritance tax due on pension funds, a significant new duty covered in our executor hub.
• Death in service benefits from registered pension schemes are excluded from the charge.
• The spouse or civil partner exemption still applies, so pensions passing to a surviving spouse or civil partner remain free of inheritance tax.
• HMRC estimates around 10,500 estates a year will become newly liable and a further 38,500 will pay more, with an average increase of around £34,000 for those paying more.
• Schemes will be able to withhold up to 50% of the pension amount for up to 15 months to help fund the inheritance tax liability.

The income tax layer described above is not being abolished: the age 75 rule continues alongside the new inheritance tax charge, which is why estates of members dying at 75 or over after April 2027 can face both taxes on the same funds. The post-2027 position has its own detailed guide in unused pension pots and inheritance tax from 2027, and our pensions and inheritance tax 2027 research quantifies who is affected.

The transition rule: date of death decides everything

One point causes more confusion than any other, so it deserves its own flag. The new rules apply to deaths on or after 6 April 2027. If death occurs before that date, the current rules described in this guide apply in full, even if the scheme does not actually pay the money to beneficiaries until after 6 April 2027. Payment date is irrelevant; date of death is everything. Families administering an estate through the transition period should establish the date of death rule first, before worrying about anything else.

Speak to a specialist

The current rules reward tidy paperwork: an up-to-date nomination form, an understanding of the age 75 divide, and beneficiaries who know the two year window exists. The 2027 reform raises the stakes considerably, especially for estates already near the inheritance tax thresholds. We can connect you with vetted estate planning and probate specialists who deal with pension death benefits every week, and if you want a personal picture first, run your figures through the free pensions and IHT 2027 estimator or start with our guide hub for pension holders preparing for 2027.