Pension death benefits before and after 75.
Age 75 is the main income-tax dividing line for inherited DC pensions. Before 75, benefits can usually be income-tax-free within allowance and two-year rules. After 75, withdrawals are taxed as income.
- ▸If the DC pension holder dies before age 75, beneficiaries can usually receive the remaining pot income-tax-free if the benefits are paid or designated within the two-year window and stay within the relevant allowance rules.
- ▸If the holder dies at 75 or older, beneficiaries pay income tax at their marginal rate on all withdrawals from the inherited pension.
- ▸On a £300,000 pot, a higher-rate taxpayer beneficiary could pay a six-figure income tax bill if the holder dies after 75 and withdrawals are taken while they remain higher-rate taxpayers.
- ▸This cliff-edge is one reason some people delay drawing from their pension in favour of spending other savings first — but that strategy carries its own risks.
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 usually be passed to beneficiaries free of income tax if the scheme pays or designates the benefits within the required two-year window and the payment is within the relevant lump sum and death benefit allowance rules. This can apply 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, usually free of income tax if the rules are met
- An annuity — used to purchase an annuity that can pay income usually free of income tax if the rules are met
The income-tax treatment applies to whatever remains in the pot at death, subject to the two-year and allowance rules. If the holder had already withdrawn £100,000 from a £400,000 pot, the remaining £300,000 can usually pass income-tax-free on a pre-75 death if those rules are met. Amounts already drawn are not clawed back into the pension.
For deaths before 6 April 2027, discretionary pension death benefits are also usually outside the estate for inheritance tax purposes. The government has confirmed that most unused pension funds and death benefits will be brought within the value of the estate for IHT from 6 April 2027, with exclusions including death-in-service benefits, funds under £1,000 and continuing annuities.
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 2026/27 are:
| Withdrawal amount (annual) | Tax rate |
|---|---|
| Within the personal allowance (£12,570) | 0% |
| £12,571 – £50,270 | 20% (basic rate) |
| £50,271 – £125,140 | 40% (higher rate) |
| Over £125,140 | 45% (additional rate) |
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 can be tax-inefficient. Taking £300,000 as a single lump sum would push many beneficiaries into higher or additional-rate tax, depending on their other income.
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 income-tax treatment can create an incentive to preserve the pension pot before 75, but it is not a universal rule. If a retiree has ISAs, general investment accounts, cash savings, and a pension, drawing from non-pension sources first keeps the pension pot intact — and if they die before 75, the remaining pot may pass income-tax-free if the timing and allowance rules are met.
This is sometimes called "pension last" sequencing. The logic can be tax-efficient under some assumptions, 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.
- ▸If a pension holder dies before 75, beneficiaries can usually take DC pension benefits income-tax-free as a lump sum or through drawdown, subject to two-year and allowance rules. [HMRC]
- ▸After 75, inherited pension withdrawals are taxed as income at the beneficiary's marginal rate — 20%, 40%, or 45% depending on total income. [HMRC]
- ▸A lump sum paid more than two years after the provider is told of the death can become taxable even where the member died before 75. [MoneyHelper]
This is factual information, not financial advice. For personal recommendations, speak to an FCA-regulated financial adviser and check the FCA register.