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Pensions, death and taxes

Since 6 April 2015 the tax treatment of pensions on death has vastly improved, the punitive 55% pensions "death tax" was abolished and benefits can be paid out tax free, in more circumstances.

The table below shows the options on death. Pensions are typically held in trust outside your estate and so continue to be free of inheritance tax (IHT) in most cases. If you make a pension contribution, or reduce the income you are drawing from your drawdown plan while in ill health or within two years of death the funds may still be liable to IHT. Tax charges may also apply if you exceed the lifetime allowance and die before age 75.

IPO Guide

What happens to your pension when you die?

Find out about the tax treatment of pensions on death, including how some pensions can be passed on tax free.

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What are the tax charges on pre-retirement or drawdown pension funds

How can your pension be passed on? If you die before age 75 If you die on or after age 75
Lump sum

Free of income tax

Taxed as income*


Free of income tax via an annuity or drawdown (both options available to any dependant or nominated beneficiary)

Taxed as income* via an annuity or drawdown (both options available to any dependant or nominated beneficiary)

*Income is taxed at the beneficiary's/beneficiaries' rate of income tax.

Important information - The information on our website is not personal advice but we can offer advice if specifically requested. What you do with your pension is an important decision, which could be irreversible. Drawdown is a more complex option than an annuity. Make sure you understand your options and check they are suitable for your circumstances: take appropriate advice or guidance if you are unsure. The Government's free Pension Wise service can help. It provides impartial guidance face-to-face, online or by phone - more on Pension Wise.

What are the tax charges if you've bought an annuity?

How can your pension be passed on? If you die before age 75 If you die on or after age 75
Lump sum
(only payable if you have chosen value protection)

Free of income tax**

Taxed as income*

(only payable if you've chosen joint life or a guarantee period)

Free of income tax**

Taxed as income*

*Income tax may be payable if the annuity is a scheme pension

**Free of income tax status will not apply if the annuity bought is a scheme pension

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Who can benefit?

These changes apply to any death benefit payments from pensions made for the first time on or after 6 April 2015 and, if paid from or as an annuity, only if death occurred on or after 3 December 2014. Benefits set up more than two years after death may lose their tax-free status.

This information is based on our understanding of current pension rules on 6 April 2016. It is a broad summary and cannot cover every nuance. You should not take, or refrain from taking, any action based solely on this article. Tax treatment and pension rules can change over time and benefits will depend on your individual circumstances.

How do I nominate my beneficiaries?

Pension providers should allow you to nominate your beneficiaries when you start paying into your pension or at any subsequent time. It should be possible to change the beneficiary easily, if your circumstances change. This nomination is not usually legally binding; however it does make your scheme aware of your wishes.

Vantage SIPP clients, including those in income drawdown, can nominate or change their beneficiaries by completing a simple 'Expression of wish' form. It is possible to nominate more than one beneficiary, and decide in what proportion you want each to benefit.

If you have an annuity you should check with your provider as to whether you can nominate a beneficiary for guaranteed period or annuity protection payments. You can with some providers but others will pay the benefits to your estate. For joint life annuities you are usually required to name who the recipient of the joint life payments would be when the annuity is set up (usually your spouse or partner, or someone who is financially dependent on you).

Request your free factsheet on what happens to your pension when you die