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, eg if the nominated person can’t 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, eg 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 don’t 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
Payment Type of pot Age its owner died Tax you usually pay
Most lump sums Defined contribution or defined benefit Under 75 No tax
Most lump sums Defined contribution or defined benefit 75 or over 45% tax deducted by the provider
Trivial commutation or ‘winding-up’ lump sums Defined contribution or defined benefit Any age Income Tax deducted by the provider
Annuity or money from a drawdown fund Defined contribution Under 75 No tax
Annuity or money from a drawdown fund Defined contribution 75 or over Income Tax deducted by the provider
Pension provided by the scheme Defined contribution or defined benefit Any age Income 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:

  • you’re paid more than 2 years after the pension provider is told of the death
  • they had pension savings worth more than £1.25 million
  • they died before 3 December 2014 and you buy an annuity from the pot

If you’re 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’s more than 2 years after the provider is told of their death when you get:

  • an annuity or drawdown fund from an ‘untouched’ pot (the person who died didn’t take any money from it) - the provider deducts Income Tax before you’re paid
  • most types of lump sum from a defined contribution pot - the provider deducts 45% tax before you’re paid
  • a lump sum from a defined benefit pot - you pay up to 45% tax yourself

If you have to pay tax yourself, fill in a Self Assessment tax return so you can be billed for the tax. Use box 13 to declare the lump sum as an unauthorised payment in the ‘Pension savings tax charges’ section - you’ll need form SA101 if you’re using paper forms.

If the person who died had pension savings worth more than £1.25 million

You pay tax on payments if both of the following apply:

  • they’re from an untouched pot (the person who died didn’t take any money from it)
  • when they’re added to the person’s other untouched pension savings, the total is more than what’s left of the person’s lifetime allowance

You pay the tax yourself at:

You pay tax once on the total amount you get from the pot - HM Revenue and Customs (HMRC) will bill you for it. They do this after they’re 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 don’t 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 wasn’t, you may have to pay Inheritance Tax.