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Death Benefits from a State Pension

Your basic State Pension is paid only to you, and can't be passed on to someone else when you die. However, if you put off claiming your State Pension (deferral), your surviving spouse or civil partner may be entitled to some of the deferral amount you had built up.

If you have contributed towards an additional State Pension your spouse or civil partner may get some of this additional pension when you die. This additional State Pension was formerly known as the State Earnings-Related Pension Scheme (SERPS) or State Second Pension.

• What happens to your State Pension when you die? (pensions and retirement planning section)

Tax on death benefits received from a deceased's State Pension

Any increases in your income that you receive as a result of the death of your spouse or civil partner will count as part of your taxable income in retirement.

• Do you have to pay tax in retirement? (pensions and retirement planning section)

• Taxable and non-taxable income at a glance

• Do you need to complete a tax return?

Death benefits from a company, personal or stakeholder pension

Depending on your pension rules, a number of benefits may be payable when you die, including:

• a return of your contributions
• a lump sum
• a pension for your spouse, civil partner or another dependant

The payment of death benefits on most pension schemes is ‘discretionary’ and therefore won’t be part of the estate for Inheritance Tax purposes. Discretionary means that the pension provider is free to decide who to pay the death benefit to. Often they’ll follow the deceased’s wishes, although they don’t have to. If the lump sum isn't discretionary there may be Inheritance Tax to pay. Your pension provider will be able to give you details about your pension. Other tax liabilities are summarised below.

Tax on death benefits from a company pension

If you die before starting to draw your company pension

Most company pensions provide for a 'Death-in-Service' benefit, similar to a life assurance policy. This means that if you die before starting to draw your company pension a lump sum is paid to a chosen person (known as the 'beneficiary').

The money can be paid free of Income Tax if it's not worth more than the pension holder's available 'lifetime allowance' (£1.5 million in tax year 2012-13). Any excess amount above the lifetime allowance will pay a tax charge of 55 per cent. This tax is paid by the beneficiary.

If you die in service, some pension schemes pay a dependants' pension. A dependants' pension counts as taxable income for the beneficiary.

• Pension rules from April 2006 (pensions and retirement planning section)

If you die after you start to draw your company pension

If you die after you start to draw your company pension any pension protection or annuity protection lump sum death benefit paid following your death will be taxed at a special lump sum death benefits rate. The Income Tax rate is:

• 35 per cent for deaths before 6 April 2023
• 55 per cent for deaths after 5 April 2023
  

It will be paid by the scheme administrator.

If a dependant's pension is provided it counts as taxable income for that dependant.

Tax on death benefits from a personal or stakeholder pension

If you die before taking any benefits

If you die before taking any benefits, the death benefits are normally paid as a lump sum. This usually consists of the return of the pension fund together with the proceeds of any life assurance.

If the amount of the lump sum - plus the value of any other registered pension scheme benefits - exceeds the Lifetime Allowance (£1.5 million in tax year 2012-13) the excess is taxed at 55 per cent. The beneficiary has to pay this.

Death benefits can also be used to provide dependants' pensions instead of being taken as a lump sum. If a dependant's pension is provided this counts as taxable income for that dependant.

If you die after taking benefits

If you die after taking benefits, any death benefits payable as pension income to a dependant will be taxed as income in the normal way.

If the pension scheme provided for a lump sum payment this will be taxed at:

• 35 per cent for deaths before 6 April 2023
• 55 per cent for deaths after 5 April 2023
  

This is payable by the scheme administrator.

• Death benefits - The Pensions Advisory Service website Opens new window

Tax on death benefits from Alternatively Secured Pensions

Alternatively Secured Pensions were available from 6 April 2023 as an alternative to buying an annuity by age 75.

An Alternatively Secured Pension allowed you to continue to invest your pension savings and draw an income from your fund within laid down limits as agreed in the terms of the Alternatively Secured Pension. This income was taxable as pensions' income in the normal way.

On 6 April 2023 Alternatively Secured Pensions ceased and became a form of Drawdown Pension.

For deaths on or after 6 April 2023 up to (and including) 5 April 2023 there is usually no tax to pay on any remaining Alternatively Secured Pension funds if either of the following applies:

• they're used to provide dependants' pensions
• they're given to charity because there are no dependants
  

However the dependant's pension will be subject to Income Tax in the normal way.

If any of the funds are passed on as an inheritance instead - for example, to pass on unused capital on death to children and grandchildren - they will be subject to Income Tax charges of up to 70 per cent. Some of this charge will be payable by the beneficiary of the 'inherited' funds and some payable by the scheme administrator.

The funds may also be subject to Inheritance Tax. Any Inheritance Tax charge for Alternatively Secured Pensions will be calculated after the rest of the deceased's estate has been set against the Inheritance Tax threshold. If there is still some unused threshold special Inheritance Tax rules will apply.

• Tax on company, personal or foreign pensions

• Tax on retirement annuities

• Alternatively Secured Pensions (ASPs) - The Pensions Advisory Service website Opens new window

More useful links

• Dealing with somebody's tax affairs after a death

• Tax when you inherit money, assets or property

• Inheritance Tax

• Tax on your State Pension

• Tax if you take your State Pension later on

• What happens to your company pension when you die (pensions and retirement planning section)

• Death benefits - The Pensions Advisory Service website Opens new window

Useful contacts

• Money, tax and benefits contacts