Tax on a private pension you inherit
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
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||Income Tax deducted by the provider|
|Trivial commutation lump sums||Defined contribution or defined benefit||Any age||Income Tax deducted by the provider|
|Annuity or money from a new drawdown fund (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’ fund or a fund first accessed before 6 April 2015)||Defined contribution||Under 75||Income Tax deducted by the provider|
|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 any of the following apply:
- you’re paid more than 2 years after the pension provider is told of the death
- they had pension savings worth more than £1 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 either:
- an annuity or drawdown fund from an ‘untouched’ pot (the person who died didn’t take any money from it)
- most types of lump sum from defined contribution or defined benefit pots
In both cases, the provider will deduct Income Tax before you’re paid.
If the person who died had pension savings worth more than £1 million
You only pay tax on payments if all of the following apply:
- they’re from an untouched pot (the person who died didn’t take any money from it)
- you got the pot within 2 years of the provider being told about the death
- 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:
- 55% if you get a lump sum
- 25% if you get any other type of payment, eg pensions, annuities or money from a drawdown fund
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.
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.
If you paid too much tax
If you fill in a Self Assessment tax return each year, you’ll get a refund when you’ve sent your return.
If you don’t, 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 in the tax year
- used up the pension pot and you have other taxable income
- didn’t use up the pension pot and you’re not taking regular payments
There’s a different way to claim if your payment came from a trust.