Tax on a Private Pension you Inherit

Tax on a Private Pension you Inherit

You may have to pay tax on payments you get from someone else’s pension pot after they die.
 

Who Can Get Payments

The person who died will usually have nominated you (told their pension provider to give you money from their pension pot).
 
But sometimes the provider can pay the money to someone else, for example if the nominated person cannot be found or has died.
 
A pension from a defined benefit pot can usually only be paid to a dependant of the person who died, for example a husband, wife, civil partner or child under 23. It can sometimes be paid to someone else if the pension scheme’s rules allow it - but it will be taxed at up to 55% as an unauthorised payment.

Passing on a Pension Pot you Inherited

If you inherit a defined contribution pot you can nominate someone to get any money you do not use before your death. The money must be in a flexi-access drawdown fund when you die.

When you Pay Tax

Whether you pay tax usually depends on the:
  • type of payment you get
  • type of pension pot
  • age of the pension pot’s owner when they died
PaymentType of PotAge its Owner DiedTax you Usually Pay
Most lump sumsDefined contribution or defined benefitUnder 75No tax
Most lump sumsDefined contribution or defined benefit75 or overIncome Tax deducted by the provider
Trivial commutation lump sumsDefined contribution or defined benefitAny ageIncome 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 contributionUnder 75No tax
Money from an old drawdown fund (a ‘capped’ fund or a fund first accessed before 6 April 2015)Defined contributionUnder 75Income Tax deducted by the provider
Annuity or money from a drawdown fundDefined contribution75 or overIncome Tax deducted by the provider
Pension provided by the schemeDefined contribution or defined benefitAny ageIncome Tax deducted by the provider

You may also have to pay tax if the pension pot’s owner was under 75 when they died and any of the following apply:

  • you are paid more than 2 years after the pension provider is told of the death
  • they had pension savings worth more than £1,055,000 (the ‘lifetime allowance’)
  • they died before 3 December 2014 and you buy an annuity from the pot

If you are paid more than 2 years after the provider is told of the death

You pay tax if the pot’s owner was under 75, and it is more than 2 years after the provider is told of their death when you get either:

In both cases, the provider will deduct Income Tax before you’re paid.

If the Person who Died had Pension Savings Worth More Than £1,055,000

You may have to pay a lifetime allowance tax charge. You pay the charge if the amount you get is more than the person’s available lifetime allowance.

You will need to pay:

The amount you pay may change if someone else starts to get payments from the same pot.

You will not pay lifetime allowance tax charge if you got the pot more than 2 years after the provider was told about the death.

HM Revenue and Customs (HMRC) will send you a bill, after they are told about the payment by the person dealing with the estate of the person who died.

The person dealing with the estate must tell HMRC within 13 months of the death or 30 days after they realise you owe tax (whichever is later).

If you Get an Annuity and the Pot’s Owner Died Before 3 December 2014

If you buy an annuity from the pot, the provider takes Income Tax off payments before you get them.

Inheritance Tax

You do not usually pay Inheritance Tax on a lump sum because payment is usually ‘discretionary’ - this means the pension provider can choose whether to pay it to you.

Ask the pension provider if payment of the lump sum was discretionary. If it was not, you may have to pay Inheritance Tax.

If you Paid too Much Tax

If you fill in a Self Assessment tax return each year, you will get a refund when you have sent your return.

If you do not, the form you fill in to claim your refund depends on whether the payment:

There is a different way to claim if your payment came from a trust.

For further information: