Inheriting a Pension: What Beneficiaries Need to Know

Pensions are treated differently from almost every other asset when someone dies, with their own distinct rules on who can inherit them, how they’re taxed, and - from April 2027 - a significant change to how they interact with Inheritance Tax. Here’s what beneficiaries need to understand.

Who receives a pension isn’t automatic - it’s usually a nomination

Unlike a will, which generally determines who inherits most assets, most defined contribution pensions are paid at the scheme administrator’s (or trustees’) discretion, guided by an ‘expression of wishes’ or beneficiary nomination form you complete while alive. This discretion is actually a benefit - it’s part of why pension death benefits have historically sat outside the value of your estate for Inheritance Tax - but it means keeping your nomination form up to date is genuinely important, especially after a marriage, divorce, new child, or a job change such as redundancy - where, incidentally, the pension itself stays completely protected even as everything else around it changes - since an out-of-date nomination can complicate or delay who ultimately receives the pension.

How the tax treatment depends on age at death

• If the pension holder died before age 75: death benefits (lump sums or income drawn by the beneficiary) are usually paid completely free of Income Tax, provided they’re paid within two years of the scheme being notified of the death.
• If the pension holder died at age 75 or over: death benefits are subject to Income Tax at the beneficiary’s own marginal rate when they draw the money - treated broadly like any other pension income.

The two-year rule matters

If a pension scheme isn’t notified of the death, and doesn’t pay out, within two years, the favourable tax-free treatment for deaths before 75 can be lost, and the payment may become taxable regardless of the age at death. Notifying the pension provider promptly after a death is more than a formality - it protects the tax treatment for beneficiaries.

The big change: Inheritance Tax from April 2027

Historically, most unused defined contribution pension funds sat outside the value of an estate for Inheritance Tax purposes - a significant advantage over ISAs, property, or other assets. From 6 April 2027, under the Finance Act 2026, most unused pension funds and death benefits will be brought into the value of the estate for Inheritance Tax. Death benefits paid to a spouse or civil partner remain exempt, as with other assets passing between spouses. This is a major shift for anyone who had been planning to preserve their pension untouched specifically to pass on to children or other beneficiaries - see our dedicated ISA vs Pension flexibility article for how this changes typical retirement drawdown ordering.

What beneficiaries can typically do with an inherited pension

• Take it as a lump sum, subject to the tax treatment above.
• Keep it invested and draw an income over time, if the scheme allows - often the more tax-efficient option, since spreading withdrawals can help manage the beneficiary’s own Income Tax band, particularly for deaths at 75 or over.
• Pass it on again in turn to their own beneficiaries in some cases, depending on scheme rules - inherited pensions can sometimes cascade across more than one generation.

A practical checklist for both pension holders and beneficiaries

• Pension holders: keep your expression of wishes form updated with every provider, particularly after major life changes.
• Beneficiaries: notify the pension scheme of a death as promptly as possible, ideally well within the two-year window.
• Both: be aware that from April 2027, pensions will no longer automatically sit outside the taxable estate - revisit estate planning assumptions built on the old rules.

The bottom line

Inheriting a pension is more favourably taxed than most other inherited assets, particularly for deaths before age 75, but the rules are genuinely different from a straightforward inheritance and depend heavily on nomination forms being current and the scheme being notified promptly. The April 2027 Inheritance Tax change is significant enough that anyone doing estate planning around pensions should revisit their assumptions now.