Tax on a private pension you inherit

Our experts tell you how HMRC will treat a pension you receive through an inheritance

Our experts at DSR Tax Claims know how hard it is to find good, quality information about HMRC’s tax regulations that is easy to understand, and that’s why we have created these handy guides to tell you everything you need to know. Our aim is to make life easier for our clients and that is why we want to share our expertise with you. You can also call our friendly team on 0330 122 9972 – we’re the tax experts you can trust. Or you can check out our online calculator to see if you could be due a refund.

Do you have to pay tax on a private pension you inherit?

It all depends on the circumstances of the pension pot and the inheritance, but you might have to pay tax on any payments you get in this way. The rules are different for inheriting a State Pension.

Who gets these pension payments?

The deceased person will usually have nominated someone to receive money from their pension pot after they die. To do this, they will have informed their pension provider to give the nominated person money from their pension pot.

If the nominated person can’t be found or has since died, the pension provider may make payments to someone else instead.

A pension from a ‘defined pension pot’ can usually only be paid to a dependent of the deceased, such as a husband, wife, civil partner or child under 23. Sometimes the pension scheme’s rules will allow it to be paid to someone who isn’t a dependent, but this payment will be taxed at 55% because it will be classed as an unauthorised payment.

If you have inherited a defined contribution pension pot, you can nominate someone to receive any money you haven’t used before your own death. This money must be in a flexi-access drawdown fund when you die to be able to do this.

What tax would you have to pay on these pension payments?

Whether you are liable to pay any tax will depend on the type or payment you get as well as the type of pension pot you inherit and the age of the pension-holder when they died. The following table gives more information.

Type of payment Type of pension pot Age that the owner died Tax you will usually pay
Most lump sums Defined Contribution or Defined Benefit Under 75 No tax to pay on these payments
Most lump sums Defined Contribution or Defined Benefit 75 or over Income Tax, which will be deducted by the pension provider
Trivial Commutation lump sums Defined Contribution or Defined Benefit Any age Income Tax, which will be deducted by the pension provider
Annuity or money from a new drawdown fund (set up or converted and first accessed from 6th April 2015) Defined contribution Under 75 No tax to pay on these payments
Money from an old drawdown fund (a ‘capped fund’ or one first accessed before 6th April 2015) Defined contribution Under 75 Income Tax, which will be deducted by the pension provider
Annuity or money from a drawdown fund Defined contribution 75 or over Income Tax, which will be deducted by the pension provider
Pension provided by the scheme Defined Contribution or Defined Benefit Any age Income Tax, which will be deducted by the pension provider

 

For more information about the types of pension funds described, you may need to seek independent financial advice from a financial adviser who has expertise in pension funds.

In addition to the above table, you might also have to pay tax if the pension holder was under 75 when they died and any of the following circumstances apply:

  • They had pension savings of over £1 million
  • They died before 3rd December 2014 and you buy an annuity from the pension pot
  • You are paid more than 2 years after the pension provider was informed of the death

If you are paid more than 2 years after the provider is informed of the death

If the pension holder was under 75 and you didn’t receive any money from the pension pot until more than 2 years after the provider was informed of the pension holder’s death, you would either get an annuity or drawdown fund from an untouched pot (meaning that the pension holder hadn’t taken anything from the pension pot), or you would get a lump sum (from a defined benefit or defined contribution pot). In both of these instances, Income Tax would be deducted by the provider before you receive any money.

If the deceased had pension savings of more than £1 million

You would only be required to pay tax if all the following circumstances apply:

  • The payments are from an untouched pot.
  • You got the pot within 2 years of the provider being told about the death.
  • When they are added to the deceased’s other untouched pension savings, the total is more than what is left of their lifetime allowance.

In these circumstances, you would pay the tax owed yourself. Tax would payable at 55% for any lump sum and then 25% if you get any other kind of payment, such as a pension, annuity or money from a drawdown fund. You would pay tax once on the total you receive from the pension pot. HMRC will send you a tax bill for this once they are informed about the payment by the person dealing with the estate. The person dealing with the estate needs to inform HMRC within 13 months of the death or 30 days after realising you owe tax, whichever is the later.

If you get an annuity and the pension holder died before 3rd December 2014

If you buy an annuity from the pension pot, the pension provider deducts Income Tax from the payments before you receive them. You won’t usually be expected to pay Inheritance Tax on a lump sum because such payments are considered to be ‘discretionary’, which means that the pension provider can choose whether to make the lump sum payment or not. You will need to ask the pension provider whether the lump sum was discretionary or not – if it wasn’t, you might be liable for Inheritance Tax.

What happens if you have paid too much tax?

If you are registered for Self Assessment and have to send a Self Assessment tax return each year, you will get a tax refund once you have sent your Self Assessment tax return.

If you’re not registered for Self Assessment, you will need to fill in a form to send to HMRC to claim a tax refund. The form you need to send will depend on the payment you receive.

If you have used up all the pension pot and have no other income in that tax year, you will need to send form P50Z(DB).

If you have used up the pension pot but have other taxable income in that tax year, you need to use form P53Z(DB)

If you didn’t use all the pension pot and you’re not taking regular payments from it, you need to use form P55(DB).

The rules are different if your payment comes from a trust.

How can DSR Tax Claims help?

We aim to make life as simple as possible for our clients and that includes giving you the information you need to make your taxes (and your life) simpler and less stressful.  Our team of experts at DSR Tax Claims are always on hand to help our clients and our excellent standing with HMRC means that we can make sure you don’t fall foul of their regulations, while claiming your maximum tax rebate. We can even take care of all that paperwork and deal with HMRC on your behalf too. Call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.

This page was last updated on 26/10/2018.

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