Pension inheritance · Guide

Pension death benefits before and after 75.

Age 75 is the dividing line in pension inheritance tax. On one side, beneficiaries pay nothing. On the other, they pay income tax on every penny withdrawn. The difference on a £300,000 pot can exceed £100,000.

By Pension Bible editorial team·Last reviewed 9 April 2026·4 min read

Before 75: beneficiaries pay no tax on the pot

When a defined contribution pension holder dies before their 75th birthday, the remaining pension pot can be passed to beneficiaries completely free of tax. This applies regardless of whether the beneficiary takes the money as:

• A lump sum — the full amount, paid out at once, with no income tax due
• Drawdown — moved into a beneficiary's drawdown arrangement, with withdrawals taken over time, all tax-free
• An annuity — used to purchase an annuity that pays a tax-free income

The tax-free treatment applies to whatever remains in the pot at death. If the holder had already withdrawn £100,000 from a £400,000 pot, the remaining £300,000 passes tax-free. There is no clawback on amounts already drawn.

Under current rules, the pot also sits outside the estate for inheritance tax purposes, meaning no IHT is due either. The beneficiary receives the full value with no deductions. (This may change under the proposed 2027 IHT reform.)

One administrative point: the scheme must normally be notified of the death and benefits settled within two years. If the lump sum isn't designated within two years, it could become taxable. Most schemes process claims well within this window.

After 75: taxed as income at the beneficiary's marginal rate

If the pension holder dies at 75 or older, the tax treatment changes entirely. Beneficiaries still inherit the remaining pot, but every withdrawal is now treated as income and taxed at the beneficiary's marginal rate.

The rates for 2025/26 are:

If the beneficiary already has income from employment, their own pension, or other sources, the inherited pension withdrawals stack on top — potentially pushing them into a higher tax band.

A lump sum withdrawal of the entire pot in one year is almost always the worst approach from a tax perspective. Taking £300,000 as a single lump sum would push most beneficiaries into the additional rate band, with an effective tax rate of roughly 40%.

The cliff-edge in numbers

Consider a £300,000 DC pension pot and a beneficiary who is a higher-rate taxpayer (40% marginal rate):

Death before 75:

• Lump sum received: £300,000
• Tax due: £0
• Net amount: £300,000

Death after 75 (lump sum):

• Lump sum received: £300,000
• Approximate income tax (blended rate): ~£107,500
• Net amount: ~£192,500

Death after 75 (drawdown at £20,000/year over 15 years):

• Total drawn: £300,000 (ignoring growth)
• Tax per year at 40%: £8,000
• Total tax: ~£120,000
• Net amount: ~£180,000 (plus any investment growth)

The difference between dying at 74 and dying at 76 — on the same pot — is over £100,000 in tax.

Beneficiaries who inherit after the holder turns 75 can manage the tax bill by drawing down gradually, staying within lower tax bands where possible. The pension inheritance calculator models these scenarios.

Why delaying drawdown can be rational

The before-75 tax-free treatment creates a logical incentive: preserve the pension pot for as long as possible before 75, and spend other assets first. If a retiree has ISAs, general investment accounts, cash savings, and a pension, drawing from the non-pension sources first keeps the pension pot intact — and if they die before 75, the entire pot passes tax-free.

This is sometimes called "pension last" sequencing. The logic is sound but the strategy has risks:

• Longevity risk — spending ISAs and cash first leaves the retiree more dependent on the pension after 75, when tax applies to their own withdrawals too.
• Market risk — keeping the full pot invested in the pension means larger exposure to market downturns.
• Legislation risk — tax rules change. The 2027 IHT reform may reduce the inheritance advantage of pensions.
• Liquidity — pensions are less accessible in emergencies than ISAs or cash.

There is no universally correct sequencing. The right order depends on pot sizes, other assets, health, and tax position. The pension drawdown calculator and income tax retirement calculator can help model the trade-offs.

This is factual information, not financial advice. If you're unsure what's right for your situation, speak to an FCA-regulated financial adviser.