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Paying Tax on Inherited Pension Pot

There may be a liability for tax on a private pension you inherit after someone's death. Check the procedure for paying taxes on money paid to you from a pension pot after the death.

INHERITED PENSION TAX: It may need paying on the payments you inherit from a private pension.

Note: The tax rules on a private pension you inherit are not the same as inheriting the State Pension.

Nominated for Pension Payments

As a rule, the person who dies will have already nominated someone to get the money [you]. This means they informed their pension provider to pay money from their pension pot over to you.

In some cases, the provider can make the payments to someone else (a third party). A typical example would be if the nominated person is untraceable or has since died.

Payments made from a defined benefit pension pot can only go to a dependant of the person who died – in most cases. This would usually be a wife, a husband, a civil partner, or a child less than 23 years old.

Some exceptions apply if the rules of the pension scheme allow it. Even so, the money will get taxed up to 55% as an unauthorised payment if you inherit pension payments of this kind.

Nominating a Pension Pot You Inherit to Someone Else

The rules for inheriting a defined contribution pot are different. You can nominate someone else to get any unused money before your death. But, it must be in a flexi-access drawdown fund at the time of your death.

Tax Liabilities on Inherited Private Pension

Several factors will determine whether you need to pay tax on an inherited pension pot. As a rule, it depends on:

  • How you receive the payments (e.g. as a lump sum or in regular payments).
  • What type of pension pot you inherited (e.g. defined benefit or defined contribution).
  • How old the owner of the pension pot was when they passed away.

Inherited Pension Payment Type of Pension Pot Age the Pot Owner Died Tax Owed (as a rule)
Most lump sums Defined contribution or defined benefit Under 75 No tax
Most lump sums Defined contribution or defined benefit 75 (or older) Income Tax deducted by the provider
Trivial commutation lump sums Defined contribution or defined benefit All ages Income Tax deducted by the provider
Annuity or money from a new drawdown fund (set up or converted and first accessed from 6 April 2015) Defined contribution Under 75 No tax
Money from an old drawdown fund (a ‘capped’ fund or a fund first accessed before 6 April 2015) Defined contribution Under 75 Income Tax deducted by the provider
Annuity or money from a drawdown fund Defined contribution 75 (or older) Income Tax deducted by the provider
Pension provided by the scheme Defined contribution or defined benefit All ages Income Tax deducted by the provider

Note: Check current Income Tax rates and Personal Allowances for citizens living in the United Kingdom.

Other tax rules apply if the owner of the pension pot was under 75 when they died and any of these apply:

  • You get paid more than two (2) years after the pension provider gets informed about the death.
  • The deceased person had pension savings valued over £1 million.
  • They passed away before the 3rd of December 2014 and you buy an annuity using the pension pot.

Paid more than 2 Years after the Provider’s Informed of the Death

There is another reason you may pay tax where the owner of the pension pot was under 75. Tax is due if the provider gets information of the death more than 2 years afterwards and you get either:

  • An annuity (or drawdown fund) from an ‘untouched’ and inherited pension pot. In other words, the deceased person did not make any withdrawals from it.
  • Almost all types of lump sums taken from a defined contribution or a defined benefit pot.

Note: The provider deducts the current Income Tax rates before you get paid in both of these cases.

The Deceased Person had Savings over £1 Million

In cases such as these, tax liabilities only apply to payments if all the following apply to you:

  • The money comes from an untouched pot (see above).
  • You received the pot within 2 years of the provider getting information about the death.
  • By adding them to the other untouched pension savings, the total amounts to more than available in the lifetime allowance.

The amount of taxation you would pay yourself would be:

HM Revenue and Customs will bill you for the tax owed. You must make one single payment for taxes liable on the total amount you get. HMRC bill you after they get informed by the person dealing with the estate of the deceased person.

Note: The executor must inform HMRC within 13 months of the death or within 30 days after they realise tax is owing. Use whichever is later.

Annuity if the Pot Owner Died before 3rd of December 2014

The pension provider deducts Income Tax before you get paid if you buy an annuity pot.

Inheritance Tax

As a rule, no Inheritance Tax is due on a lump sum. This is because the payment is usually a ‘discretionary‘ one. This means the pension provider can choose whether to pay it to you.

Check with the pension provider to confirm if the payment of a lump sum was discretionary. If not, the payment may be liable for Inheritance Tax.

Did You Pay Too Much Tax?

Those who fill in a Self Assessment tax return each year get a refund after they send in the return. Those who do not must use a form to claim the refund. It will depend on whether the payment:

  • Emptied the pension pot and you have no other source of income in the tax year.
  • Emptied the pension pot and you do have other taxable income.
  • Did not empty the pension pot but you are not receiving regular payments from it.

Note: The rules differ regarding trusts and how they are taxed by HMRC if the payment came from a trust.

Tax Rules on a Private Pension You Inherit in the United Kingdom