Pensions from April 2027
Death before 75: what heirs pay on the pension from 2027
Dying before 75 used to mean a pension passed on almost untaxed. The income tax side survives the reform; the inheritance tax side does not.
When a pension member dies before their 75th birthday, lump sums paid to beneficiaries are normally free of income tax up to the member's lump sum and death benefit allowance of £1,073,100, reduced by any tax-free cash the member took in life, provided the money is paid within 2 years of the scheme learning of the death. Income from beneficiary drawdown or an annuity bought for the beneficiary is also tax free. That part of the system is unchanged. What changes, for deaths on or after 6 April 2027, is that the unused pot counts in the estate, so inheritance tax at 40 % applies above the tax-free bands whatever the member's age. When both rules meet, each lump sum is tested against the allowance net of the inheritance tax on it. A single parent who dies at 68 with a £450,000 home, £150,000 of savings and a £900,000 pot paid £40,000 of inheritance tax before the change; from 6 April 2027 the bill is £400,000, of which £240,000 falls on the pension, with no income tax for the children.
Death before 75: the lump sum and death benefit allowance
Taxable as heirs’ income
£26,900
| Allowance left | £873,100 |
| Lump sums tested, net of IHT | £900,000 |
| Tax free | £873,100 |
Paid within 2 years of the provider hearing of the death. Beneficiary drawdown is not tested.
Law read and sums checked by Radif Partners · Editorial policy · How the tax is worked out
Age at death and date of death: two separate tests
Two questions decide what happens to a pension after its owner dies, and they are independent. The member's age at death settles income tax: before 75, most death benefits reach the beneficiary free of it, while from 75 the beneficiary pays at their own rates. The date of death settles inheritance tax: before 6 April 2027, a pension paid at the scheme's discretion stays outside the estate, and from that date it is included, as section 71 of the Finance Act 2026 provides.
Put together, the reform hits younger deaths in a particular way. Before it, a member who died at 68 could pass on a pot with neither tax, which is why pensions were so often the last asset families expected to be taxed. After it, the income tax advantage remains but the pot is added to everything else the member owned. HMRC’s impact note puts the share of inheritance tax paid by estates of people aged 75 or over at 79 %, so deaths before that age account for the smaller part of the bill. For the estates concerned, though, the pot has often not been drawn at all, and all of it enters the estate.
The allowance that caps tax-free lump sums
The limit on tax-free lump sums is the lump sum and death benefit allowance, £1,073,100. It is a single allowance used in two ways. Tax-free cash taken in retirement, normally up to 25 % of each pot and at most £268,275 in total, uses it up during life. Whatever remains is available on death for lump sum death benefits paid to beneficiaries, and the GOV.UK page on pension tax adds that a member under 75 with less than a year to live can take the whole pot tax free within the same allowance. A member who took the full £268,275 of tax-free cash therefore leaves £804,825 of allowance for the heirs.
Any lump sum above the remaining allowance is taxed as the recipient's income at their marginal rate. For most families the question never arises, because the remaining allowance is larger than the pot; it becomes real for large pots, or where the member has already used much of the allowance.
Why the test is run after inheritance tax
From 6 April 2027, a large lump sum can carry inheritance tax and also exceed the allowance. The question is which comes first. Section 637T of the Income Tax (Earnings and Pensions) Act 2003, as amended, answers it: when inheritance tax is due, each lump sum death benefit is tested against the allowance at its "IHT-adjusted amount", which is the lump sum less the inheritance tax attributable to it. Only the net figure uses allowance, and only the net excess is taxed as income. Without that rule the same pound could be taxed at the inheritance tax rate and then again at the heir's income tax rate on its full value.
The table follows the worked estate as the pot grows: a single parent, £450,000 home left to two children, £150,000 of savings, death at 68, maximum tax-free cash already taken, so £804,825 of allowance left. Each child earns £50,000 a year, and every pound of pension is assumed to be paid as a lump sum within the 2 year window.
| Pot | IHT on the pension | Lump sums tested | Above allowance, old rules | Above allowance, from 2027 | Heirs’ income tax, from 2027 |
|---|---|---|---|---|---|
| £900,000 | £240,000 | £660,000 | £95,175 | £0 | £0 |
| £1,400,000 | £420,000 | £980,000 | £595,175 | £175,175 | £81,263 |
| £1,800,000 | £622,500 | £1,177,500 | £995,175 | £372,675 | £170,138 |
| £2,400,000 | £856,000 | £1,544,000 | £1,595,175 | £739,175 | £335,063 |
At £900,000 nothing exceeds the allowance under either regime. At £1,800,000, the old rules would have left £995,175 above it, taxed as the children's income but with no inheritance tax on the pension. From 6 April 2027 the pension carries £622,500 of inheritance tax, the tested amount drops accordingly, and only £372,675 exceeds the allowance. The estate at that size also passes £2,000,000, which removes the residence nil-rate band; the page on a pension of a million pounds looks at that effect alone.
Lump sum, drawdown or annuity for the beneficiary
A beneficiary does not always take a lump sum. Some schemes let a nominee keep the fund invested in beneficiary drawdown, or use it to buy an annuity. When the member died before 75, GOV.UK says that income from a new drawdown fund or such an annuity is tax free, and drawdown designated for a beneficiary is not tested against the lump sum and death benefit allowance at all. For very large pots that distinction matters: the allowance limits tax-free lump sums, not tax-free drawdown.
Inheritance tax does not care which form the benefit takes. The value of the pot at death is in the estate from 6 April 2027, and the tax attributable to it has to be met from the fund or by the beneficiary, through the routes described on the page on who pays. HMRC’s technical note warns that money already used to buy an annuity with an insurer is no longer available for a payment notice, so the timing of an annuity purchase can affect how the tax is funded.
The two-year window
The income tax exemption for lump sums after a death before 75 comes with a time limit. A lump sum paid more than 2 years after the scheme administrator was told of the death loses its tax-free status and is taxable in full. The clock starts with the notification, not with the grant of probate, and the new inheritance tax steps (information requests between schemes and personal representatives, withholding of benefits, valuation) now have to fit into the same period. Executors who notify each scheme promptly and keep evidence of the date reduce the risk that paperwork pushes a payment past the deadline.
Before and after the reform for the same family
The ledger shows the worked estate with a £900,000 pot, comparing a death at 68 just before the change with one on or after 6 April 2027. In both columns the children pay no income tax on the pension, because the member was under 75.
| Death before 6 April 2027 | Death from 6 April 2027 | |
|---|---|---|
| Estate counted for inheritance tax | £600,000 | £1,500,000 |
| Nil-rate band and residence band used | £500,000 | £500,000 |
| Inheritance tax | £40,000 | £400,000 |
| of which on the pension | £0 | £240,000 |
| Income tax paid by the heirs on the pension | £37,962 | £0 |
| Each of 2 heirs keeps | £711,019 | £550,000 |
The cost of the reform for this family is the inheritance tax on the pension, £240,000, plus the extra tax that the larger estate pushes onto the rest. Compare a death at 80 with the same estate after the change: each child would keep £400,283 instead of £550,000, because income tax at their own rates is added on top of inheritance tax. The page on pensions after 75 explains how the two taxes combine.
None of this tells anyone what to do with their own pension. Nominations, the choice between a lump sum and drawdown, and the timing of claims each have consequences that depend on the whole estate. The scheme, the personal representatives, a solicitor or a regulated adviser can check a real case against the rules described here.