Pension Death Benefits and IHT — The Rules

When someone dies with money still in a pension, what happens to it depends on two largely separate questions: how much income tax the beneficiary pays when they draw the money out, and — from April 2027 — whether the value also counts towards the deceased's estate for inheritance tax. Understanding both halves of the picture, and how they now interact, is essential for anyone naming beneficiaries or administering an estate that includes a pension.

The current rules: death before and after age 75

The age at which someone dies — specifically, whether they die before or after their 75th birthday — has long been the single biggest factor in how their pension death benefits are taxed for the beneficiary. Broadly, if someone dies before age 75, lump sums and drawdown income paid to their beneficiaries can often be paid free of income tax, provided the benefits are paid out within the relevant allowances and time limits set by the scheme and HMRC. This has made death before 75 the more tax-efficient scenario for beneficiaries, at least from an income tax perspective, and is one reason pensions have been viewed as such an effective way to pass on wealth.

If someone dies on or after their 75th birthday, the position changes: beneficiaries drawing on the inherited pension — whether as a lump sum or as income through drawdown — generally pay income tax on those withdrawals at their own marginal rate, exactly as if it were their own pension income. A beneficiary who is a higher-rate taxpayer, for example, could see a substantial portion of an inherited pension pot taxed at 40% or more as they draw it out, whereas a beneficiary with little other income might pay a much lower effective rate by drawing the money gradually rather than all at once. This is why the timing of death relative to age 75, while entirely outside anyone's control, has such a significant effect on the eventual value a beneficiary receives.

Before vs after 75: a summary table

The "double layer": how IHT and income tax can now both apply

From April 2027, a pension can potentially face two separate layers of tax rather than one. The first layer is inheritance tax, charged against the estate once the pension's value is added to everything else the deceased owned, at 40% above the available nil-rate band. The second layer is income tax, charged against the beneficiary personally as and when they draw money out of the inherited pension, at their own marginal rate — a layer that already existed for deaths after 75, and in some circumstances even for deaths before 75 if the money isn't drawn within the required time limits.

Putting these together: a pension pot inherited from someone who died after age 75, in an estate large enough to trigger inheritance tax, could see a portion taken by inheritance tax against the estate before the beneficiary even receives anything, and then a further portion taken as income tax when the beneficiary eventually draws down what remains. This does not mean the two taxes simply add up to 40% plus the beneficiary's marginal rate on the same pound — the mechanics of exactly how the two interact, including whether any relief or adjustment applies to avoid excessive double taxation, are among the details still being finalised ahead of the 2027 implementation date. But the general shape of the concern — that a single pension pot can now be reduced by both taxes rather than just one — is well understood and worth planning around.

For example, take a £200,000 pension pot left by someone who died after 75, within an estate that is already above the nil-rate band. If inheritance tax at 40% applies to that pension value within the estate, roughly £80,000 could be lost to IHT before any money reaches the beneficiary. If the beneficiary then draws down the remaining £120,000 as a higher-rate taxpayer, a further significant slice could be lost to income tax on top, depending on how and when they draw it. Compare that with the same £200,000 pot inherited from someone who died before 75 in an estate below the nil-rate band: potentially none of it lost to either tax. This range — from very little tax to a very substantial combined bill — shows just how much the specific circumstances of a death now matter for the eventual value a family receives.

Why keeping your expression of wishes up to date matters so much

Unlike a will, which generally directs exactly who inherits your assets, most pension death benefits are usually paid at the discretion of the scheme trustees or provider, guided by an expression of wishes (sometimes called a nomination form) that you complete and keep updated. This discretion actually exists for a good reason — it is one of the main mechanisms that has historically allowed pension death benefits to be paid without automatically forming part of the estate, since a genuinely discretionary payment isn't treated as something the deceased was entitled to direct. But it also means that if your expression of wishes is out of date, missing, or names someone you're no longer in contact with — an ex-partner, for instance — the scheme trustees have to use their judgement about who should benefit, which may not match what you would actually have wanted.

Reviewing your expression of wishes after any major life event — marriage, divorce, the birth of a child, the death of a previously nominated beneficiary — is one of the simplest and most impactful things you can do to make sure your pension death benefits go where you intend. This is worth doing with every pension you hold, including old workplace pensions from previous jobs that you may not think about often; each provider holds its own separate nomination, and updating one does not automatically update the others.

Defined contribution vs defined benefit death benefits

The rules above mostly describe defined contribution (DC) pensions, where there is an actual pot of money that can be paid out as a lump sum or drawn down flexibly by a beneficiary. Defined benefit (DB) pensions — often called final salary or career average schemes — generally work quite differently on death. Rather than a discretionary lump sum, most DB schemes pay a fixed spouse's or dependant's pension: a guaranteed ongoing income, often around half of the member's own pension, paid to a surviving spouse, civil partner, or eligible dependant for the rest of their life, with specific and sometimes more limited provisions for children or other dependants.

Because a DB dependant's pension is an income stream rather than a transferable capital sum, it is generally expected to sit outside the scope of the 2027 IHT change in the same way it has always sat outside standard IHT treatment, though as with other categories described on this site, the precise legislative boundaries are still being finalised. Some DB schemes do also pay a lump sum death-in-service benefit if the member dies while still employed and before retirement, and these lump sums may be treated more similarly to DC lump sums for both income tax and the incoming IHT rules. If you have a DB pension, it is worth checking your scheme's specific death benefit rules directly with the scheme administrator, since DB arrangements vary considerably between employers and sectors.

Practical steps for managing this

Given the potential for both income tax and inheritance tax to apply to the same pension pot from 2027, it's worth thinking about death benefits as part of a joined-up estate plan rather than treating each pension in isolation. That can include considering how quickly a beneficiary should draw down an inherited pension (drawing more slowly can sometimes reduce the income tax rate applied, by keeping the beneficiary in a lower tax band each year), keeping expression of wishes forms current across every scheme you hold, and discussing with a financial adviser how the combined effect of IHT and income tax might apply to your specific pension arrangements and wider estate.

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  Update your expression of wishes with every pension provider you hold a pension with, including old workplace schemes, so trustees know exactly who you want to benefit.

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  Check whether each pension is defined contribution or defined benefit, since the death benefit rules and IHT treatment can differ significantly between the two.

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  Get a rough estimate of your total estate value, including pensions, to understand whether inheritance tax is likely to apply once the 2027 rules take effect.

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  Discuss with beneficiaries how they might approach drawing down an inherited pension, since the pace of withdrawal can affect the income tax rate they pay.

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  Speak to a financial adviser or solicitor about whether trusts, gifting, or life insurance in trust could help manage the combined tax exposure across your estate.

A worked example: the combined tax effect in practice

Consider Tom, who dies at 78 leaving a £180,000 pension pot to his adult daughter, within an estate that is already £100,000 above his available nil-rate bands before the pension is even added. Once the pension is included under the post-2027 rules, that £180,000 adds directly to the taxable portion of the estate, generating a further £72,000 of inheritance tax at 40% — reducing what's ultimately available to pass on by that amount before Tom's daughter has even touched the money. If she then draws down what remains of the pension as a higher-rate taxpayer, a further portion is lost to income tax on each withdrawal, since Tom died after age 75. Depending on how quickly she draws the money and her own income in each tax year, the combined effect of both taxes could reduce the original £180,000 pot very substantially by the time it is fully accessed.

Now compare this with Tom's neighbour, who dies at 70 leaving an identical £180,000 pension pot to her son, within an estate of similar overall size. Because she died before age 75, her son may be able to draw the inherited pension largely free of income tax, provided it is designated within the usual time limits. He would still see the pension counted within the estate for inheritance tax purposes under the post-2027 rules, so a similar 40% IHT charge could apply against the estate — but without the additional layer of income tax on withdrawal, the overall proportion lost to tax is meaningfully lower than in Tom's case. This comparison illustrates why age at death, while nobody's choice, has such an outsized effect on how much of a pension ultimately reaches the next generation.

Frequently asked questions

Does the 2027 change mean all pensions are taxed twice? No — not every estate will be large enough to trigger inheritance tax, and many beneficiaries drawing from a pension where the original holder died before 75 may still avoid income tax on withdrawals. The "double layer" applies specifically where the estate is large enough for IHT to bite and the death occurred at or after age 75, so it will not affect every family in the same way.

Can I avoid the double layer by taking my whole pension as cash before I die? Cashing in a large pension pot in one go usually triggers a significant immediate income tax charge on the withdrawal, and the resulting cash then sits inside your estate as an ordinary asset for inheritance tax purposes anyway — so this rarely improves the overall tax position, and can make it worse. Any decision like this should only be made with professional advice tailored to your full circumstances.

What happens if I don't have an expression of wishes on file at all? Most scheme trustees will still use their discretion to decide who receives any death benefits, typically looking to your closest relatives — a spouse, civil partner, or children — in the absence of clear guidance from you. However, this can lead to delays while trustees gather information about your family circumstances, and it removes any certainty that the money goes exactly where you would have wanted, which is why providers strongly encourage every member to keep a current expression of wishes on file rather than leaving the decision entirely to trustee discretion.