Inherited pensions can be confusing, especially during such a vulnerable time. In this guide we discuss what happens when you inherit a pension, how it could be paid out to you and what you can do with it.
When someone passes away and has named you as a beneficiary of their pension, the pension provider(s) will usually write to you to explain your options.
Can I inherit a state pension?
The New State Pension cannot be inherited. However, you may be able to inherit part of your deceased partner’s Additional State Pension if your marriage or civil partnership started before 6 April 2016, and they either:
- Reached State Pension age before 6 April 2016
- Passed away before 6 April 2016 but would have reached State Pension age on or after that date.
visit the state pension and your partner tool
How inherited pensions are paid out
Depending on the type of pension you inherited, you may be able to have these paid out in different ways.
Defined Contribution pension
Most workplace pensions are known as a defined contribution pension. These pensions work by building up a pot of money to use at retirement, therefore any money left in the pension pot can be inherited by beneficiaries named in an expression of wishes for.
Learn about expression of wishes forms
The pension provider will contact you to explain your options which usually include:
- Take some or all of the remaining money as one or more lump sums
- Purchasing an annuity which will convert some or all of the money into guaranteed income
- Leave the remaining money invested until you need it
Annuities
If the person who passed away had purchased an annuity and received income this way, then annuities usually stop paying out on their death, unless they had set it up in the following ways:
- A guarantee period – this means the annuity will pay out for a minimum period, including to beneficiaries if the person passes away before the minimum period ends.
- A joint-life basis – a named person (typically a spouse) can continue to receive a portion of the income
- A single-life basis – when set up with a nominee option, the nominee will continue to receive an income at a pre-agreed rate
- Value or capital protection – a lump sum might be paid to beneficiaries if the annuity had paid out less than it cost the person before they passed away.
Pensions and tax
At the time of writing this guide, pensions are not included as part of the estate and tax implications differ. From 6 April 2027, private pensions will be included in the calculation for estate values for inheritance tax purposes. However, the spousal exemption will remain in place, meaning that there will be no inheritance tax on pensions inherited between spouses.
Other taxes may need to be taken into consideration too, such as income tax.
If the pension pot owner passed away under the age of 75:
Generally the money you receive will be tax free. However there may be tax implications if the lump sum taken is above the pension pot owner’s lump sum and death benefit allowance (LSDBA).
Additionally, old drawdown funds (a ‘capped’ fund or a fund that was first accessed before 6 April 2015) and pensions provided by the scheme may also have income tax deducted by the provider.
If the pension pot owner passed away over the age of 75:
Any money paid out to you, or any other beneficiary, will be subject to tax, based on your tax position, and will be deducted by the pension provider.
What is the Lump Sum and Death Benefits Allowance (LSDBA)?
The LSDBA is usually £1,073,100, but may be higher if the pension pot owner held a protected allowance.
Over the age of 75 it isn’t tested, however under the age of 75, the following lump sums count towards your individual lump sum and death benefit allowance:
- Serious ill-health lump sum death benefit
- Uncrystallised funds lump sum death benefit
- Drawdown pension fund lump sum death benefit
- Annuity protection lump sum death benefit
- Flexi-access drawdown lump sum death benefit
- Pension protection lump sum death benefit
- Defined benefits lump sum death benefit
- A pension commencement lump sum
- An uncrystallised funds pension lump sum – 25% tax-free portion of the lump sum
- Stand-alone lump sums
If the pension pot owner exceeded the LSDBA then you, as the beneficiary of the pension, will pay income tax on the amount over the allowance.
What can you do with an inherited pension?
There is a wide range of options available to you when you inherit a pension, whether you are considering investing, drawdown, withdrawal or combining your pensions.
If you are in this position then we recommend speaking with one of our Independent Financial Advisers who can work with you to fully discuss your options based on your personal circumstances.
