Can You Pass Your Pension on Tax-Free?

10 min read

Published: 25 April 2026

Last reviewed: April 2026

For many of us, a pension is more than just a personal safety net for our later years; it is a legacy we hope to leave behind for those we love. As you approach retirement, your focus naturally shifts from accumulation to preservation. You want to ensure that the wealth you have spent decades building doesn't simply vanish or get swallowed by unnecessary taxation when you are no longer here.

The rules surrounding inheriting a pension in the UK are often cited as some of the most tax-efficient in the British financial system. However, they are also some of the most misunderstood. With major legislative changes on the horizon and complex age-related thresholds, navigating the path to a tax-free inheritance requires careful planning and a clear understanding of the current 2025/26 tax landscape.

This guide is for information only and does not constitute financial advice. Always speak to a qualified financial adviser before making financial decisions.

The Golden Rule: The Age 75 Threshold

When it comes to inheriting a pension in the UK, the single most important factor is the age of the pension holder at the time of their death. The UK tax system treats pension death benefits very differently depending on whether you pass away before or after your 75th birthday.

Dying Before Age 75

If you pass away before the age of 75, your beneficiaries can usually inherit your remaining defined contribution pension fund completely tax-free. This applies whether they take the money as a lump sum, set up a flexi-access drawdown account, or purchase an annuity. The funds must typically be designated to the beneficiary within two years of the provider being notified of the death to maintain this tax-free status.

Dying After Age 75

If you pass away aged 75 or older, the tax-free "honeymoon period" ends. Your beneficiaries will still inherit the pension, but any withdrawals they make will be taxed at their marginal rate of income tax. For example, if your beneficiary is a basic-rate taxpayer, they will pay 20% on what they withdraw; if they are a higher-rate taxpayer, they could pay 40% or even 45%.

Feature	Death Before Age 75	Death At or After Age 75
Lump Sum Tax	Usually Tax-Free (subject to LSDBA)	Beneficiary's Marginal Rate
Income Tax on Drawdown	Usually Tax-Free	Beneficiary's Marginal Rate
Inheritance Tax (IHT)	Currently Exempt (until April 2027)	Currently Exempt (until April 2027)
2-Year Designation Rule	Applies to maintain tax-free status	Not applicable (always taxed)

The Lump Sum and Death Benefit Allowance (LSDBA)

While the "tax-free before 75" rule is generous, it is not infinite. Following the abolition of the Lifetime Allowance (LTA), the government introduced the Lump Sum and Death Benefit Allowance (LSDBA). For the 2025/26 tax year, this limit is set at £1,073,100.

If the total of your tax-free lump sums taken during your life plus the death benefits paid out exceeds this threshold, the excess may be subject to income tax at the beneficiary's marginal rate, even if you die before 75. It is a critical figure for those with "high-value" pension pots to monitor closely as they approach retirement.

Worked Example

Scenario: David passes away at age 72 with a pension pot worth £1.2 million. He has never taken any tax-free cash during his lifetime.

Outcome: His beneficiary, Sarah, can inherit £1,073,100 (the LSDBA limit) as a tax-free lump sum. The remaining £126,900 would be treated as Sarah's taxable income for that year. Alternatively, if Sarah chooses to move the entire £1.2 million into a "Beneficiary's Drawdown" account rather than taking a lump sum, she could potentially avoid the immediate tax charge on the excess, depending on specific scheme rules and current legislation.

Inheritance Tax: The 2027 Seismic Shift

For years, pensions have been the "ultimate IHT planning tool" because they sat outside of your estate for Inheritance Tax purposes. However, following the 2024 Autumn Budget, the UK government announced that from April 2027, most unused pension funds and death benefits will be included in the value of the estate for IHT.

For the 2025/26 tax year, pensions remain largely exempt from the 40% IHT bill, but those approaching retirement must now plan for a future where their pension is no longer an "IHT-free" zone. This makes nominating a pension beneficiary correctly more important than ever, as the interplay between IHT and income tax becomes more complex.

The "Double Tax" Risk: From 2027, if you die after 75, your pension could be subject to 40% IHT and your beneficiaries could pay income tax on withdrawals. This "double hit" makes early estate planning essential.

Nominating a Pension Beneficiary: Why Your Will Isn't Enough

A common misconception is that your pension is covered by your Will. In the UK, most pension schemes are held in trust, which means the pension trustees have the discretion to decide who receives your death benefits. This is actually an advantage, as it is the reason why pensions currently sit outside your estate for IHT purposes.

To guide the trustees, you must complete an Expression of Wish or Nomination of Beneficiary form. Without this, the trustees may not be aware of your intentions, leading to delays and potential tax complications for those you leave behind.

Who can you nominate?

Dependants: Spouses, civil partners, and children under 18.
Nominees: Anyone else you choose (friends, adult children, or siblings).
Successors: Individuals chosen by your beneficiaries to inherit what remains of the pension after the first beneficiary passes away.
Charities: You can nominate a charity, which can be particularly tax-efficient if you have no surviving dependants.

Different Rules for Different Pensions

The rules for inheriting a pension in the UK differ significantly between the two main types of schemes:

1. Defined Contribution (DC) Pensions

These are "pot-based" pensions (such as SIPPs or modern workplace schemes). They are the most flexible; beneficiaries can usually choose between a lump sum, an annuity, or keeping the money invested in a drawdown account to take an income as and when needed.

2. Defined Benefit (DB) Pensions

Often called "Final Salary" schemes, these are much more rigid. They usually only pay out a "Survivor's Pension" (typically 50% of your pension income) to a spouse or civil partner. If you are single or have adult children, there may be no "pot" to pass on at all. Some schemes offer a small lump sum if you die within a certain period of starting your pension (often five or 10 years).

Steps to Secure Your Pension Legacy

Securing the future for your loved ones requires more than just saving; it requires active management of your death benefits. Use the following steps to ensure your pension is passed on according to your wishes:

Trace all old pensions: Use the government's Pension Tracing Service to find any forgotten pots from previous employers.
Check your nominations: Log in to each pension provider's portal and ensure your "Expression of Wish" forms are up to date. Life changes such as separation" class="text-brand-600 hover:text-brand-800 underline">divorce or the arrival of grandchildren often make old forms obsolete.
Review your DB benefits: Understand exactly what your Defined Benefit scheme pays out. If it offers no death benefits for your children, you may need to look at life insurance or other assets to provide for them.
Consider the IHT impact: With the 2027 changes looming, talk to an adviser about whether taking more income now or gifting money during your lifetime is more tax-efficient than leaving it in the pension.
Communicate: Ensure your beneficiaries know who your pension providers are and where to find your policy numbers.

The "Successor" Strategy: If your beneficiary doesn't need the money immediately, they can leave the funds in a "Beneficiary Drawdown" account. This keeps the money within the pension wrapper, where it can continue to grow free from Capital Gains Tax and Dividend Tax until they need it.

Key Takeaways

The Age 75 Rule: Passing away before 75 usually allows for tax-free inheritance; at or after 75, beneficiaries pay income tax on withdrawals.
LSDBA Limit: Be aware of the £1,073,100 threshold for tax-free lump sum death benefits in the 2025/26 tax year.
Update Your Nominations: Your Will does not control your pension; you must complete an "Expression of Wish" form with your provider.
IHT Changes: Prepare for April 2027, when pensions are expected to fall within the scope of Inheritance Tax.
DC vs. DB: Defined Contribution pots offer the most flexibility for passing on wealth to any chosen beneficiary, while Defined Benefit schemes are usually limited to spouses.

Frequently Asked Questions

Are inherited pensions always tax-free in the UK?

No, not always. If the pension holder dies before age 75, the pension is generally passed on tax-free to beneficiaries (subject to the Lump Sum and Death Benefit Allowance). However, if the pension holder dies on or after age 75, beneficiaries will usually pay Income Tax on any withdrawals they make from the inherited pension.

What is the Lump Sum and Death Benefit Allowance (LSDBA)?

The LSDBA is a maximum limit, currently £1,073,100 (for 2024/25 and likely 2025/26), on the total amount of tax-free lump sums that can be paid from your pensions during your lifetime and as tax-free death benefits if you die before age 75. Any amounts exceeding this allowance when taken as a lump sum on death before 75 become taxable.

Why is nominating a pension beneficiary so important?

Nominating a pension beneficiary ensures your pension funds go to the people you intend without significant delays. It typically keeps the pension outside your estate for Inheritance Tax purposes and streamlines the process for your loved ones, avoiding probate and ensuring your wishes are respected by the pension provider.

Do inherited pensions count towards Inheritance Tax?

Generally, no. Funds held within a defined contribution pension scheme are usually excluded from your estate for Inheritance Tax purposes. This means they typically won't be subject to the 40% IHT charge, regardless of your age at death, making pensions a highly tax-efficient asset to pass on.

Can beneficiaries choose how to receive an inherited pension?

Yes, for defined contribution pensions, beneficiaries typically have several options. They can often choose to take the funds as a lump sum, transfer them into their own "beneficiary's drawdown" pension to take flexible income, or purchase an annuity for a guaranteed income. The tax implications of these choices depend on the original pension holder's age at death.

Do my beneficiaries have to pay Inheritance Tax on my pension?

For the 2025/26 tax year, most pensions are exempt from Inheritance Tax (IHT) as they are held in trust. However, the UK government has announced that from April 2027, most unused pension funds will be included in the estate for IHT purposes.

What happens if I don't nominate a beneficiary?

If you haven't completed an Expression of Wish form, the pension trustees will use their discretion to identify your beneficiaries. This can cause significant delays, and the money may not go to the person you intended, or it could potentially lead to higher tax liabilities.

Can I leave my pension to my children instead of my spouse?

Yes, with a Defined Contribution pension, you can nominate anyone you choose, including adult children. However, many Defined Benefit (final salary) schemes only allow for a survivor's pension to be paid to a legal spouse or civil partner.

Is there a time limit for claiming a tax-free pension death benefit?

Yes. To maintain the tax-free status for deaths before age 75, the pension funds must generally be designated to the beneficiary within two years of the date the scheme administrator first knew (or should have known) of the member's death.

What is the Lump Sum and Death Benefit Allowance (LSDBA)?

The LSDBA is a limit (currently £1,073,100 for 2025/26) on the total amount of tax-free lump sums that can be paid from a pension both during your life and upon your death. Any lump sum death benefits exceeding this may be taxed at the beneficiary's marginal rate.

Do my beneficiaries have to pay Inheritance Tax on my pension?

What happens if I don't nominate a beneficiary?

Can I leave my pension to my children instead of my spouse?

Is there a time limit for claiming a tax-free pension death benefit?

What is the Lump Sum and Death Benefit Allowance (LSDBA)?

Do my beneficiaries have to pay Inheritance Tax on my pension?

What happens if I don't nominate a beneficiary?

Can I leave my pension to my children instead of my spouse?

Is there a time limit for claiming a tax-free pension death benefit?

What is the Lump Sum and Death Benefit Allowance (LSDBA)?

Disclaimer: This guide is for information only and does not constitute financial advice. Always speak to a qualified financial adviser before making financial decisions.