A pension pot does not simply become part of an estate, and the tax the person inheriting pays is usually income tax rather than inheritance tax. What decides it is a short list of facts: who was nominated, what kind of pot it is, how the money is taken, and above all how old the pension holder was when they died. Age 75 is the line the whole answer turns on, and almost every surprise here comes from not knowing which side of it applies.
What happens to a private pension when you die: who can receive it
GOV.UK's position is that the person who died will usually have nominated you, meaning they told the pension provider who should receive money from the pot, though the provider can sometimes pay somebody else, for example where the nominated person cannot be found or has died. A defined benefit pension can usually only be paid to a dependant such as a husband, wife, civil partner or child under 23, and paying it elsewhere where scheme rules allow can be taxed at up to 55% as an unauthorised payment.
What happens to your private pension when you die: UK rules turn on age 75
For most lump sums from either a defined contribution or a defined benefit pot, GOV.UK's table gives no tax where the owner died under 75, unless the lump sum is above the owner's lump sum and death benefit allowance, and income tax deducted by the provider where the owner died at 75 or over. An annuity, or money from a drawdown fund set up or first accessed from 6 April 2015, is likewise untaxed where death was under 75 and taxed as income where it was at 75 or over.
Old drawdown funds behave differently
The one case that breaks the pattern is money from an older drawdown arrangement, a capped fund or a fund first accessed before 6 April 2015. GOV.UK's table applies income tax deducted by the provider to that money even where the pension holder died under 75. A beneficiary comparing their position with somebody else's and finding it worse is often looking at exactly this distinction.
Pensions and inheritance tax planning: whether the pot is in the estate
The tax in the table above is income tax, charged on the person receiving the money, and it is a different question from whether the pot forms part of the estate for inheritance tax. That depends on the kind of arrangement and how the scheme pays the death benefit, which the scheme administrator can confirm from its own rules. It is the question to ask the provider in writing before assuming either answer, and it is where an adviser earns a fee on a substantial pot.
What a beneficiary should do first
Find out which provider holds the pot and whether a nomination is on file, because that is what the provider acts on. Establish the pension holder's age at death and whether the fund is a pre-2015 drawdown arrangement, since those two facts settle most of the tax. Then take the payment decision, because a lump sum and a drawdown income are taxed differently and the choice is usually made once.
Other questions people ask
Is a pension part of the estate for inheritance tax?
It depends on the arrangement and how the scheme pays the death benefit, and the scheme administrator can confirm its own rules. The tax GOV.UK sets out for an inherited private pension is income tax on the person receiving the money, which is a separate question from whether the pot is counted in the estate.
Why does age 75 matter so much?
Because GOV.UK's table is built around it. Most lump sums are untaxed where the owner died under 75, subject to the lump sum and death benefit allowance, and taxed as the recipient's income where the owner died at 75 or over. The same split applies to an annuity and to a drawdown fund first accessed from 6 April 2015.
Can I pass on a pension I inherited?
GOV.UK states that if you inherit a defined contribution pot you can nominate someone to receive any money you do not use before your own death, and that the money must be in a flexi-access drawdown fund when you die. It is a nomination to the provider rather than a gift in a will.
Does this page advise on what to do with a pot?
No. It sets out what GOV.UK publishes about who can receive a pension and what tax applies, with the source. What to do with an inherited pot is a regulated advice question, and an enquiry from here goes to an authorised firm; this site does not advise, arrange or recommend a provider.