You may have to pay tax on payments you get from someone else’s pension pot after they die.
There are different rules on inheriting the State Pension (external link).
Who Can Get Payments
The person who died will usually have nominated you (external link) (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 (external link) 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 (external link).
Passing on a Pension Pot you Inherited
If you inherit a defined contribution (external link) 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 (external link) 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
Payment | Type of Pot | Age its Owner Died | Tax you Usually Pay |
|---|---|---|---|
Most lump sums | Under 75 | No tax | |
Most lump sums | Defined contribution or defined benefit | 75 or over | Income Tax (external link) deducted by the provider |
Trivial commutation (external link) lump sums | Defined contribution or defined benefit | Any age | Income Tax (external link) deducted by the provider |
Annuity or money from a new drawdown fund (external link) (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 (external link)’ fund or a fund first accessed before 6 April 2015) | Defined contribution | Under 75 | Income Tax (external link) deducted by the provider |
Annuity or money from a drawdown fund | Defined contribution | 75 or over | Income Tax (external link) deducted by the provider |
Pension provided by the scheme | Defined contribution or defined benefit | Any age | Income Tax (external link) 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 two years after the pension provider is told of the death
they had pension savings worth more than £1,055,000 (the ‘lifetime allowance (external link)’)
they died before 3 December 2014 and you buy an annuity from the pot
If you are paid more than two 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 two years after the provider is told of their death when you get either:
an annuity or drawdown fund from an ‘untouched’ pot (the person who died did not take any money from it)
most types of lump sum from defined contribution or defined benefit pots (external link)
In both cases, the provider will deduct Income Tax (external link) before you are paid.
If the Person who Died had Pension Savings Worth More Than £1,055,000
You may have to pay a lifetime allowance (external link) 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:
- 55% if you get a lump sum
- 25% if you get any other type of payment, for example pensions, annuities or money from a drawdown fund (external link)
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 two 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 (external link) 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 (external link) off payments before you get them.
Inheritance Tax
You do not usually pay Inheritance Tax (external link) 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 (external link) 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:
used up the pension pot and you have no other income (external link) in the tax year
used up the pension pot and you have other taxable income (external link)
did not use up the pension pot (external link) and you’re not taking regular payments
There is a different way to claim if your payment came from a trust (external link).